UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                    FORM 10-K

(Mark One)
|X|   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
      ACT OF 1934
      For the fiscal year ended June 30, 2003

                                       OR

|_|   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934

                         Commission file number 0-12957

                           ENZON PHARMACEUTICALS, INC.
             (Exact name of registrant as specified in its charter)

            Delaware                                            22-2372868
(State or other jurisdiction of                               (I.R.S. Employer
incorporation or organization)                               Identification No.)

                685 Route 202/206, Bridgewater, New Jersey 08807
               (Address of principal executive offices) (Zip Code)

                                 (908) 541-8600
              (Registrant's telephone number, including area code)
        Securities registered pursuant to Section 12(b) of the Act: None
           Securities registered pursuant to Section 12(g) of the Act:
                          Common Stock, $.01 par value;
                         Preferred Stock Purchase Rights
                                (Title of Class)

      Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|

      Indicate by check mark if disclosure of delinquent filers pursuant to item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|

      Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes |X| No |_|

      The aggregate market value of the Common Stock, par value $.01 per share,
held by non-affiliates based upon the reported last sale price of the Common
Stock on December 31, 2002, was approximately $719,305,000.

      As of September 24, 2003, there were 43,528,896 shares of Common Stock,
par value $.01 per share, outstanding.

                       Documents Incorporated by Reference

      Portions of the registrant's definitive Proxy Statement for the Annual
Meeting of Stockholders scheduled to be held on December 2, 2003, to be filed
with the Commission not later than 120 days after the close of the registrant's
fiscal year, has been incorporated by reference, in whole or in part, into Part
III Items 10, 11, 12, 13 and 14 of this Annual Report on Form 10-K.

<PAGE>

                           ENZON PHARMACEUTICALS, INC.

                          2003 Form 10-K Annual Report

                                TABLE OF CONTENTS

                                                                            Page
                                                                            ----

                                     PART I
Item 1.  Business                                                              4
Item 2.  Properties                                                           30
Item 3.  Legal Proceedings                                                    30
Item 4.  Submission of Matters to a Vote of Security Holders                  30

                                     PART II

Item 5.  Market for the Registrant's Common Equity and Related
                  Stockholder Matters                                         31
Item 6.  Selected Financial Data                                              32
Item 7.  Management's Discussion and Analysis of Financial
                  Condition and Results of Operations                         32
Item 7A. Quantitative and Qualitative Disclosures About Market Risk           57
Item 8.  Financial Statements and Supplementary Data                          58
Item 9.  Changes in and Disagreements With Accountants on Accounting
                  and Financial Disclosure                                    58
Item 9A. Controls and Procedures                                              58

                                    PART III

Item 10. Directors and Executive Officers of the Registrant                   59
Item 11. Executive Compensation                                               59
Item 12. Security Ownership of Certain Beneficial Owners and Management       59
Item 13. Certain Relationships and Related Transactions                       59
Item 14. Principal Accounting Fees and Services                               59
                                     PART IV

Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K      60

ADAGEN(R), ONCASPAR(R), PROTHECAN(R), ABELCET(R), ABLC(R), CLEAR(R), CLEAR and
DESIGN(R) and SCA(R) are our registered trademarks. Other trademarks and trade
names used in this annual report are the property of their respective owners.

All information on this Form 10-K is as of September 29, 2003 and the Company
undertakes no obligation to update this information.

Information contained in this Annual Report contains "forward-looking
statements" which can be identified by the use of forward-looking terminology
such as "believes," "expects," "may," "will," "should" or "anticipates" or the
negative thereof, or other variations thereof, or comparable terminology, or by
discussions of strategy. No assurance can be given that the future results
covered by the forward-looking statements will be achieved. The matters set
forth in the section entitled Risk Factors in Item 7, "Management's Discussion
and Analysis of Financial Condition and Results of Operations," constitute
cautionary statements identifying important factors with respect to such
forward-looking statements, including certain risks and uncertainties, that
could cause actual results to


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<PAGE>

vary materially from the future results indicated in such forward-looking
statements. Other factors could also cause actual results to vary materially
from the future results indicated in such forward-looking statements.

We maintain a website at www.enzon.com to provide information to the general
public and our stockholders on our products, resources and services along with
general information on Enzon and its management, career opportunities, financial
results and press releases. Copies of our most recent Annual Report on Form
10-K, our Quarterly Reports on Form 10-Q or our other reports filed with the
Securities and Exchange Commission, or SEC, can be obtained, free of charge as
soon as reasonably practicable after such material is electronically filed with,
or furnished to the SEC, from our Investor Relations Department by calling
908-541-8777, through an e-mail request from our website at
www.enzon.com/request or through the SEC's website by clicking the direct link
from our website at www.enzon.com/request or directly from the SEC's website at
www.sec.gov. Our website and the information contained therein or connected
thereto are not intended to be incorporated into this Annual Report on Form
10-K.


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<PAGE>

                                     PART I

Item 1. BUSINESS

Overview

      We are a biopharmaceutical company that develops, manufactures and markets
human therapeutics for life-threatening diseases on our own and through
strategic partnerships. We are currently executing a dual-pronged strategy
designed to broaden our revenue stream and expand our product pipeline through
both internal research and development efforts and the execution of strategic
transactions. In November 2002, we completed our acquisition of the North
American rights to ABELCET(R) from Elan Corporation plc ("Elan"). The purchase
included the operating assets associated with the development, manufacture,
sales and marketing of ABELCET in North America, including a 56,000 square foot
manufacturing facility in Indianapolis, Indiana. Additionally, we hired certain
Elan sales and plant personnel as part of the acquisition.

      We market four human therapeutic products through two specialized sales
forces, ABELCET(R) (amphotericin B lipid complex injection), ONCASPAR(R)
(peg-L-asparaginase), ADAGEN(R) (pegademase bovine injection) and DEPOCYT(R)
(cytarabine liposome injection). We also receive royalties on sales of
PEG-INTRON(R), an enhanced version of Schering-Plough's alpha-interferon 2a
product, INTRON(R) A, that uses our proprietary PEG technology, as well as a
share of certain revenues received by Nektar Therapeutics ("Nektar") on sales of
Hoffmann-La Roche's PEG-enhanced version of alpha-interferon 2b, PEGASYS(R).

      ABELCET is a lipid complex formulation of amphotericin B used primarily in
the hospital to treat immuno-compromised patients with invasive fungal
infections. It is indicated for the treatment of invasive systemic fungal
infections in patients who are intolerant of conventional amphotericin B therapy
or for whom conventional amphotericin B therapy has failed. ABELCET provides
patients with the broad-spectrum efficacy of conventional amphotericin B, while
causing significantly lower kidney toxicity than amphotericin B. ONCASPAR is a
PEG-enhanced version of a naturally occurring enzyme called L-asparaginase. It
is currently approved in the U.S., Canada, and Germany and is used in
conjunction with other chemotherapeutics to treat patients with acute
lymphoblastic leukemia who are hypersensitive or allergic to native or
unmodified forms of L-asparaginase. ADAGEN is used to treat patients afflicted
with a type of Severe Combined Immunodeficiency Disease, or SCID, also known as
the Bubble Boy Disease, which is caused by the chronic deficiency of the
adenosine deaminase enzyme, or ADA. In December 2002, we acquired from
SkyePharma, Inc. ("SkyePharma") the North American rights to DEPOCYT, an
injectable chemotherapeutic approved for the treatment of patients with
lymphomatous meningitis. SkyePharma is currently conducting Phase IV clinical
studies that seek to expand the DEPOCYT label to include an indication for
neoplastic meningitis.

      PEG-INTRON is a PEG-enhanced version of Schering-Plough's alpha-interferon
product, INTRON A. We have designed PEG-INTRON to allow for less frequent dosing
and to yield greater efficacy as compared to INTRON A. Our worldwide partner for
PEG-INTRON, Schering-Plough, has received approval in the United States and the
European Union for PEG-INTRON as a monotherapy and for use in combination with
REBETOL(R) (ribavirin, USP) capsules for the treatment of chronic hepatitis C in
adult patients not previously treated with alpha-interferon. The product is
currently in Phase III clinical trials for hepatitis C in Japan and is also
being evaluated for use as long term maintenance monotherapy in cirrhotic
patients that have failed previous treatment (COPILOT study). Schering-Plough is
also conducting a Phase III clinical trial for PEG-INTRON for the treatment of
high risk malignant melanoma, and earlier stage clinical trials for other
indications, including HIV.

      We focus our research and development efforts on human therapeutics for
life threatening diseases through applications of our proprietary PEG and SCA
technologies as well as technologies


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<PAGE>

licensed from strategic partners. We have two compounds, PEG-Camptothecin and
ATG FRESENIUS-S, which are expected to move into late stage clinical trials
during fiscal 2004, as well as compounds at early stages that are being
developed internally or in conjunction with strategic partners.

      PEG-Camptothecin is a PEG-enhanced version of camptothecin, a compound in
the class of molecules called topoisomerase I inhibitors. Camptothecin has been
shown in clinical testing to be potent against certain tumor types, but its
previous clinical development by others has been discontinued due to significant
side effects and poor solubility. We have demonstrated in preclinical studies
that PEG-Camptothecin preferentially accumulates in tumors and has comparable or
better efficacy compared to other cytotoxic compounds, including currently
marketed topoisomerase I inhibitors. We are currently conducting Phase II
clinical trials for PEG-Camptothecin in gastric and gastroesophageal junction
cancers as a monotherapy. We plan to initiate a pivotal clinical trial for
PEG-Camptothecin in gastric and gastroesophageal cancers in the first half of
calendar 2004.

      During June 2003 we in-licensed the North American rights to develop
ATG-FRESENIUS S, a polyclonal antibody preparation used for T-lymphocyte
suppression in organ transplant patients, which is currently marketed by
Fresenius Biotech ("Fresenius") in over 60 countries worldwide. ATG-FRESENIUS S
has advantages over conventional monoclonal antibody products on the market
because the product targets a range of antigens on activated T-cells and
depletes T-cells that otherwise would result in an immunologic attack on the
transplanted organ leading to its rejection. For solid organ transplantation,
ATG-FRESENIUS S has been shown to be effective, typically leading to a
substantial improvement of graft survival. Clinicians have recently demonstrated
that ATG-FRESENIUS S can be administered conveniently as a single high dose just
prior to the surgical procedure. Moreover, clinicians have reported using
ATG-FRESENIUS S for conditioning regimens and prevention of graft versus host
disease in bone marrow transplantation. We intend to pursue marketing approval
for ATG-FRESENIUS S in the U.S. by initiating a Phase III clinical program for
this product subject to, and in accordance with, the U.S. Food and Drug
Administration (FDA) requirements during the first half of calendar year 2004.

      We have also out-licensed our proprietary PEG and SCA technology on our
own and through our strategic partners Nektar and Micromet AG ("Micromet").
There are currently two PEG products licensed through our Nektar partnership in
late stage clinical trials, MACUGEN(R) (pegatanib) for age-related macular
degeneration and diabetic macular edema and CDP-870, an anti-TNF therapy for
rheumatoid arthritis, both of which are being developed by Pfizer.

      We manufacture ABELCET, ADAGEN, and ONCASPAR in two facilities in the
United States. DEPOCYT is manufactured by SkyePharma. PEG-INTRON is manufactured
and marketed by Schering-Plough.

Marketed Products

      ABELCET

      ABELCET is a lipid complex formulation of amphotericin B used primarily in
the hospital to treat immuno-compromised patients with invasive fungal
infections. It is indicated for the treatment of invasive systemic fungal
infections in patients who are intolerant of conventional amphotericin B therapy
or for whom conventional amphotericin B therapy has failed. ABELCET provides
patients with the broad-spectrum efficacy of conventional amphotericin B, while
providing significantly lower kidney toxicity than amphotericin B.

      We acquired the North American rights to ABELCET from Elan in November
2002 for $360.0 million, plus acquisition costs. As part of the acquisition, we
also acquired the operating assets associated with the development, manufacture,
sales and marketing of ABELCET in North America,


                                       5
<PAGE>

including a 56,000 square foot manufacturing facility in Indianapolis, Indiana.
In addition to North American distribution rights we also acquired the rights to
develop the product in Japan.

      The increase in severe fungal infections is primarily driven by advances
in medical treatment, such as increasingly aggressive chemotherapy procedures
and advances in organ and bone marrow transplantation procedures. These advances
have caused an increase in the number of immuno-compromised patients who are at
risk from a variety of fungal infections which are normally combated by an
individual's healthy immune system. For these patients, such infections
represent a major mortality risk.

      Amphotericin B, the active ingredient in ABELCET, is a broad-spectrum
polyene anti-fungal agent that is believed to act by penetrating the cell wall
of a fungus, thereby killing it. In its conventional form, amphotericin B is
particularly toxic to the kidneys, an adverse effect that often restricts the
amount that can be administered to a patient. While still exhibiting residual
nephrotoxicity, ABELCET is able to deliver therapeutic levels of amphotericin B
while significantly reducing the kidney toxicity associated with the
conventional drug.

      It is suggested that the enhanced therapeutic index of ABELCET relative to
conventional amphotericin B is due in part to the selective release of active
amphotericin B at the sites of infection. This release may occur through the
action of phospholipases that are released by the fungus itself or by activated
host cells, including phagocytic, vascular smooth muscle, or capillary
endothelial cells.

      The clinical utility of ABELCET has been documented in a multi-center
database developed for clinicians to share and exchange information regarding
the clinical course of invasive fungal infections and clinical experience. The
Collaborative Exchange of Antifungal Research (CLEAR(R)) database is one of the
most comprehensive registries in fungal disease. CLEAR encompasses prospectively
gathered data from a total of 3,514 patient records, collected from 1996 to 2000
from over 120 institutions in the United States and Canada.

      The CLEAR database documents that ABELCET has had overall clinical
response rates across a wide spectrum of fungal pathogens (both yeasts and
molds) and has been efficacious and safe across the broadest spectrum of
patients compared to other anti-fungals. Of particular significance, the CLEAR
database documents the efficacy and safety of ABELCET in rapidly emerging, more
difficult to treat pathogens such as fusarium, zygomycetes, and candida
infections that are resistant to other anti-fungal treatments. The CLEAR
database is the largest known registry that has studied these emerging fungal
pathogens.

      ONCASPAR

      ONCASPAR, is a PEG-enhanced version of a naturally occurring enzyme called
L-asparaginase. It is currently approved in the U.S., Canada and Germany and is
used in conjunction with other chemotherapeutics to treat patients with acute
lymphoblastic leukemia who are hypersensitive or allergic to native, i.e.,
unmodified, forms of L-asparaginase. During 2002, we amended our license
agreement with Aventis Pharmaceuticals, Inc. U.S. ("Aventis") to reacquire the
rights to market and distribute ONCASPAR in the United States, Canada, Mexico
and the Asia/Pacific region in return for a payment of $15.0 million and a
royalty of 25% on our net sales of the product through 2014. MEDAC GmbH has the
exclusive right to market ONCASPAR in most of Europe and parts of Asia.

      L-asparaginase is an enzyme which depletes the amino acid asparagine upon
which certain leukemic cells are dependent for survival. Other companies market
unmodified L-asparaginase in the U.S. for pediatric acute lymphoblastic leukemia
and in Europe to treat adult acute lymphoblastic leukemia and non-Hodgkin's
lymphoma, as well as pediatric acute lymphoblastic leukemia. The therapeutic
value of unmodified L-asparaginase is limited by its short half-life, which
requires every-


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<PAGE>

other-day injections, and its propensity to cause a high incidence of allergic
reactions. We believe that ONCASPAR offers significant therapeutic advantages
over unmodified L-asparaginase. ONCASPAR has a significantly increased half-life
in blood, allowing every-other-week administration, and it causes fewer allergic
reactions.

      ADAGEN

      ADAGEN, is used to treat patients afflicted with a type of Severe Combined
Immunodeficiency Disease, or SCID, also known as the Bubble Boy Disease, which
is caused by the chronic deficiency of the adenosine deaminase enzyme, or ADA.
ADAGEN represents the first successful application of enzyme replacement therapy
for an inherited disease. SCID results in children being born without fully
functioning immune systems, leaving them susceptible to a wide range of
infectious diseases. Currently, the only alternative to ADAGEN treatment is a
well-matched bone marrow transplant. Injections of unmodified ADA are not
effective because of its short circulating life (less than 30 minutes) and the
potential for immunogenic reactions to a bovine-sourced enzyme. The attachment
of PEG to ADA allows ADA to achieve its full therapeutic effect by increasing
its circulating life and masking the ADA to avoid immunogenic reactions.

      The ADA enzyme in ADAGEN is obtained from bovine intestine. We purchase
this enzyme from the world's only FDA-approved supplier, Hoffman-LaRoche
Diagnostic GmbH, which until 2002 supplied ADA derived from cattle in Germany.
In November 2000, bovine spongiform encephalopathy ("BSE"), also known as mad
cow disease, was detected in certain cattle herds in Germany. During 2002, in
order to comply with FDA requirements, our supplier secured a new source of
bovine intestines from New Zealand, which has no confirmed cases of BSE in its
cattle herds.There is evidence of a link between the agent that causes BSE in
cattle and a new variant form of Creutzfeld-Jakob disease or nvCJD in humans.
Based upon the use of certain purification steps taken in the manufacture of
ADAGEN and from our analysis of relevant information concerning this issue, we
consider the risk of product contamination to be extremely low. However, the
lengthy incubation period of BSE and the absence of a validated test for the BSE
agent in pharmaceutical products make it impossible to be absolutely certain
that ADAGEN is free of the agent that causes nvCJD. To date, cases of nvCJD have
been rare in the United Kingdom, where large numbers of BSE-infected cattle are
known to have entered the human food chain. To date, no cases of nvCJD have been
linked to ADAGEN or, to our knowledge, any other pharmaceutical product,
including vaccines manufactured using bovine derived materials from countries
where BSE has been detected.

      We are marketing ADAGEN on a worldwide basis. We utilize independent
distributors in certain territories including the United States, Europe and
Australia. Currently, 76 patients in twelve countries are receiving ADAGEN
therapy. We believe many newborns with ADA-deficient SCID go undiagnosed and we
are therefore focusing our marketing efforts for ADAGEN on new patient
identification.

      Our permit issued by the United States Department of Agriculture ("USDA")
to import ADA expired in March 2003. We currently have more than six months
supply of ADA enzyme in inventory and have applied for a new import permit from
the USDA. We cannot guarantee that such import permit will be issued. If the
USDA fails to issue a new import permit or if our sole supplier is unable or
unwilling to continue supplying us with ADA, it is likely that we will be unable
to produce or distribute ADAGEN once we utilize our current inventory of ADA
enzyme.

      DEPOCYT

      In December 2002, we acquired the North American rights to DEPOCYT from
SkyePharma. DEPOCYT is an injectable chemotherapeutic approved for the treatment
of patients with lymphomatous meningitis. It is a sustained release formulation
of the chemotherapeutic agent, cytarabine or Ara-C. DEPOCYT gradually releases
cytarabine into the cerebral spinal fluid (CSF)


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<PAGE>

resulting in a significantly extended half-life, prolonging the exposure to the
therapy and allowing for more uniform CSF distribution. This extends the dosing
interval to once every two weeks, as compared to the standard twice-weekly
intrathecal chemotherapy dosing of cytarabine.

      Lymphomatus meningitis is a debilitating form of neoplastic meningitis,
which is a complication of many cancers. Neoplastic meningitis may result in
spinal cord dysfunction, cranial neuropathies and cerebral hemispheric
dysfunction, and is characterized by such symptoms as numbness or weakness in
the extremities, pain, sensory loss, double vision, loss of vision, hearing
problems, headaches and other problems. Autopsy studies indicate that 8% of all
cancer patients will develop neoplastic meningitis.

      In a randomized, multi-center trial of patients with lymphomatous
meningitis, treated either with 50 mg of DEPOCYT administered every 2 weeks or
standard intrathecal chemotherapy administered twice a week, results showed that
DEPOCYT achieved a complete response rate of 41% compared with a complete
response rate of 6% for unencapsulated cytarabine. In this study, complete
response was prospectively defined as (i) conversion of positive to negative CSF
cytology and (ii) the absence of neurologic progression. DEPOCYT has also
demonstrated an increase in the time to neurologic progression of 78.5 days for
DEPOCYT versus 42 days for unencapsulated cytarabine. There are no controlled
trials, however, that demonstrate a clinical benefit resulting from this
treatment, such as improvement in disease related symptoms, increased time to
disease progression, or increased survival.

    PEG-INTRON

         PEG-INTRON is a PEG-enhanced version of Schering-Plough's recombinant
alpha-interferon product called INTRON A. Linking INTRON-A to PEG results not
only in a prolonged half-life, allowing for once weekly dosing, but also greater
efficacy as compared to unmodified INTRON-A. Schering-Plough currently markets
INTRON A for 16 major antiviral and oncology indications worldwide. Historically
the largest indication for INTRON A is hepatitis C. INTRON A is also used to
treat certain types of cancer. Our worldwide partner for PEG-INTRON,
Schering-Plough, has received approval for the treatment of adult patients with
chronic hepatitis C as a monotherapy and in combination with REBETOL capsules in
the United States and the European Union. Schering-Plough is currently
conducting late-stage clinical trials of PEG-INTRON for the treatment of
hepatitis C in Japan, and has announced that it expects to file for approval of
PEG-INTRON in that country in the near term. Schering-Plough is also evaluating
PEG-INTRON as a long term maintenance monotherapy (COPILOT study) and in a
separate study is evaluating PEG-INTRON in combination with REBETOL in hepatitis
C patients who did not respond to or had relapsed following previous
interferon-based therapy. Schering-Plough is conducting a Phase III clinical
trial in the U.S. of PEG-INTRON for the treatment of malignant melanoma and is
conducting earlier stage clinical trials for other indications, including HIV.

      Under our licensing agreement with Schering-Plough, we have earned
milestone payments and we receive royalties on Schering-Plough's worldwide sales
of PEG-INTRON. Schering-Plough is responsible for all manufacturing, marketing
and development activities for PEG-INTRON.

      Hepatitis C

      According to an article published in the New England Journal of Medicine,
approximately 3.9 million people in the United States are infected with the
hepatitis C virus. Approximately 2.7 million of these people are characterized
as having chronic hepatitis C infection. We believe that the number of people
infected with the hepatitis C virus in Europe is comparable to that in the
United States. It is also estimated that approximately 2.0 million people in
Japan are infected with hepatitis C. According to the World Health Organization,
there are approximately 170 million chronic cases of hepatitis C


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<PAGE>

worldwide. A substantial number of people in the United States who were infected
with hepatitis C more than 10 years ago are thought to have contracted the virus
through blood transfusions. Prior to 1992, the blood supply was not screened for
the hepatitis C virus. In addition, the majority of people infected with the
virus are thought to be unaware of the infection because the hepatitis C virus
can incubate for 10 or more years before patients become symptomatic.
Schering-Plough estimates that only 10 to 15 percent of patients with hepatitis
C have been treated.

      The COPILOT (Colchicine versus PEG-INTRON Long-Term) long term maintenance
monotherapy study is evaluating maintenance monotherapy with PEG-INTRON in
hepatitis C patients with advanced cirrhosis. In this study, 250 patients with
advanced cirrhosis who had previously failed interferon-based therapy have been
randomized to two groups: 130 patients receive once-weekly PEG-INTRON (0.5
mcg/kg) and 120 patients receive twice-daily colchicine (0.6 mg). At the end of
one year of treatment, the PEG-INTRON group had a reduction in detectable virus
(HCV RNA), while the virus levels in the colchicine group remained the same.
This study is ongoing.

      Schering-Plough has reported results of a clinical study comparing
PEG-INTRON plus REBETOL to REBETRON(R) combination therapy containing REBETOL
capsules and INTRON A. When analyzed based upon optimal body weight dosing, 61%
of patients treated with PEG-INTRON plus REBETOL had sustained virologic
response compared to 47% of patients treated with REBETRON combination therapy
who had sustained virologic response. When the results of this clinical trial
were analyzed without using optimal body weight dosing, 54% of the patients
treated with PEG-INTRON plus REBETOL had sustained virologic response compared
to 47% of patients treated with REBETRON who had sustained virologic response.
Of the patients in this study who received at least 80% of their treatment of
PEG-INTRON plus REBETOL, 72% had sustained virologic response compared to
sustained virologic response in 46% of patients who received less than 80% of
their treatment.

      During June 2002, the National Institutes of Health (NIH) issued a
consensus statement asserting that the most effective treatment for hepatitis C
is combination therapy with PEGylated interferon and ribavirin for a period of
48 weeks. The consensus statement also provided recommendations on how to
broaden the treatment population as well as how to prevent transmission of the
virus.

      Hoffmann-La Roche markets a PEGylated version of its alpha-interferon
product ROFERON(R)-A, called PEGASYS, in both North America and Europe that
competes directly with PEG-INTRON. Schering-Plough and Hoffmann-LaRoche have
been the major competitors in the global alpha-interferon hepatitis C market
since the approval of INTRON A and ROFERON-A. Based on published prescription
data, PEG-INTRON currently accounts for the majority share of prescriptions
written in the United States. Since its launch in December 2002 PEGASYS has
taken market share away from PEG-INTRON and the overall market for pegylated
alpha-interferon in the treatment of Hepatitis C has not increased sufficiently
so as to offset the effect the increasing PEGASYS sales have had on sales of
PEG-INTRON. As a result, quarterly sales of PEG-INTRON and the royalties we
receive on those sales have flattened or declined in recent quarters. We cannot
assure you that PEGASYS will not continue to gain market share at the expense of
PEG-INTRON which could result in lower PEG-INTRON sales and royalties to us.

      Schering-Plough recently announced plans to initiate a clinical study
involving 2,880 patients that will directly compare PEG-INTRON versus PEGASYS,
both used in combination with ribavirin. Schering-Plough Research Institute, in
collaboration with leading medical centers, will conduct the comparative study
in response to requests by the hepatitis C medical and patient communities, and
to clear up misperceptions in the marketplace about these two treatments. The
trial will compare the efficacy and safety of individualized weight-based dosing
with PEG-INTRON and REBETOL versus PEGASYS, which is administered as a flat dose
to all patients regardless of individual body weight, and COPEGUS(R) (ribavirin,
USP) dosed either at 1,000 mg or 1,200 mg, in U.S. patients with genotype


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<PAGE>

1 chronic hepatitis C.

      Cancer

      INTRON A is also used in the treatment of cancer. Of the 16 indications
for which INTRON A is approved throughout the world, 12 are cancer indications.
Currently, INTRON A is approved in the U.S. for four cancer indications and used
in some cases for other indications on an off-label basis. The four indications
for which INTRON A is approved in the U.S. are late stage malignant melanoma,
follicular NHL (low grade), chronic myelogenous leukemia and AIDS-related
Kaposi's sarcoma.

      In June 2001, we reported that Schering-Plough completed its Phase III
study comparing PEG-INTRON to INTRON A in patients with newly diagnosed chronic
myelogenous leukemia, or CML. In this study, PEG-INTRON administered once weekly
demonstrated clinical comparability to INTRON A administered daily, with a
comparable safety profile. Despite demonstrating clinical comparability, the
efficacy results for PEG-INTRON did not meet the protocol-specified statistical
criteria for non-inferiority, the primary endpoint of the study. The major
cytogenic response rates at month 12 for both PEG-INTRON and INTRON A were
similar to those previously reported in the literature for alpha-interferon.

      In addition to conducting this Phase III study of PEG-INTRON in CML,
Schering-Plough has advised us that it is working with independent investigators
to research initiatives with PEG-INTRON in oncology indications through a
comprehensive medical affairs program. This program includes ongoing studies
with PEG-INTRON in high-risk melanoma, myeloma and non-Hodgkin's lymphoma, both
as a monotherapy and in combination with other agents. Schering-Plough is
currently conducting a Phase III clinical trial of PEG-INTRON for high-risk
malignant melanoma.

      Published data from a Phase I clinical trial of PEG-INTRON in various
cancer types have shown that some patients who previously did not respond to
unmodified INTRON A treatment did respond to PEG-INTRON. In that trial,
PEG-INTRON was administered once per week as opposed to up to five times per
week, which is a typical therapy regimen using unmodified INTRON A, and we
expect that the once per week dosing regimen may be used in treating various
cancer types.

      Potential Other Indications

      We believe that PEG-INTRON may have potential in treating other diseases,
including HIV, hepatitis B and multiple sclerosis. A Phase I clinical trial of
PEG-INTRON has been conducted for HIV. In this study, 58% of the 30 patients had
substantial reductions in their levels of HIV after adding a weekly injection of
PEG-INTRON to their combination treatments.

Products Under Development

      PEG-CAMPTOTHECIN

      PEG-Camptothecin, which we have trademarked as PROTHECAN, is a
PEG-enhanced version of camptothecin, a small molecule that is a potent
anticancer compound in the class of topoisomerase I inhibitors. Camptothecin was
originally developed at the National Institutes of Health and is now off patent.

      For many years, camptothecin has been known to be a very cytotoxic agent
but its low solubility and toxicity has rendered the product not suitable for
human use. Two camptothecin derivatives, topotecan and irinotecan, have been
approved by the FDA for the treatment of small-cell lung, ovarian and colorectal
cancers. These two products together achieved 2002 worldwide sales of
approximately $970 million.



                                       10
<PAGE>

     We have linked PEG and  camptothecin  so that it forms a prodrug,  i.e.,  a
compound  that is  converted  into the  active  drug  within  the body.  The PEG
component  confers a long  circulating  half-life  and  allows the  compound  to
accumulate  in tumor sites.  Animal tests have shown that  PEG-Camptothecin  has
better or equal efficacy compared to other cytotoxic compounds,  including other
topoisomerase  I  inhibitors.  We are  currently  conducting a Phase II clinical
trial of PEG-Camptothecin in gastric and gastroesophageal junction cancers.

      In parallel, we intend to initiate a second study in the first half of
calendar 2004 that will evaluate PEG-Camptothecin in patients whose disease
progressed following prior chemotherapy. One of the two patients who achieved a
partial response in the Phase II study had a tumor that reoccurred following a
prior chemotherapy. We are focusing the PEG-Camptothecin development program on
second line therapy for gastric and gastroesophageal junction cancers, as there
are no single-agent drug approvals for these indications.

      The annual incidence of adenocarcinoma of the stomach and gastroesophaeal
junction is approximately 800,000 new cases worldwide, with approximately 24,000
of these occurring in the United States. The median survival for patients with
advanced stages of these cancers from the time of diagnosis is approximately 7-8
months, and there is currently no drug approved for second line treatment.

      We are seeking Orphan Drug designation for PEG-Camptothecin under the
Orphan Drug Act. Orphan drug designation is administered by the FDA and is
granted to applicants when the prevalence of the disease is less than 200,000
patients in the United States. The Orphan Drug Act provides for seven years of
marketing exclusivity in the United States upon FDA approval of the product, as
well as certain potential additional financial and tax benefits.

      Based on the clinical results to date for PEG-Camptothecin we plan to
focus our current clinical trial program on gastric and gastroesophageal
junction cancers and will no longer pursue our work in the areas of pancreatic,
small-cell lung, and non-small-cell lung cancers. We will continue to consider
other potential indications for PEG-Camptothecin, as warranted, as clinical data
become available.

      ATG-FRESENIUS S

      ATG-FRESENIUS S is a polyclonal antibody preparation used for T-lymphocyte
suppression in organ transplant patients, which we in-licensed in June 2003 for
North American development and marketing from Fresenius Biotech ("Fresenius").
ATG-FRESENIUS S was first approved in September 1983 in Germany for the
prevention and treatment of acute rejection in solid organ transplantation. To
date, more than 40,000 patients in over 60 countries outside the United States
have used ATG-FRESENIUS S. Currently, the product is not approved for use in
North America.

      Dramatic advances in immunology, surgery, and tissue preservation have
transformed organ transplantation from experimental to routine over the past few
decades. Of the world's seven major pharmaceutical markets (U.S., France,
Germany, Italy, Spain, UK, and Japan), the U.S. is by far the single largest
solid organ transplant market. 2002 data indicates that the U.S. accounted for
over 24,000 organ transplantations. Of this total, the majority were kidney
transplants.

      The immune system includes a host of targets that are impacted by the
transplant process. Monoclonal antibodies will, by definition, target only one
specific receptor such as the IL-2 receptor (Simulect/Zenepax). ATG-FRESENIUS S
is a polyclonal antibody preparation that binds to a number of targets
simultaneously, providing potentially enhanced efficacy through a more
comprehensive treatment of the immunological cascade. THYMOGLOBULIN(R)
(anti-thymocite globulin), which is marketed by Genzyme in the U.S., is the only
polyclonal antibody preparation currently approved for this indication by the
FDA. ATG-FRESENIUS S differs from Thymoglobulin in a number of significant ways,
leading us to believe it will emerge successfully in the clinic and allow us to
compete in the market effectively.


                                       11
<PAGE>

      We will be responsible for North American clinical development and
regulatory approval, and Fresenius will be responsible for supplying the drug
and all manufacturing aspects necessary to obtain U.S. regulatory approval. For
the first indication (prevention of rejection in kidney transplants) Fresenius
will provide clinical supplies at no charge to us. We are obligated to make
milestone payments to Fresenius of $1.0 million upon FDA approval of the
Investigational New Drug Application ("IND") and $1.0 million upon submission of
the Biologics License Application ("BLA").

      Other PEG Products

      Our PEG technology may be applicable to other potential products. We are
currently conducting preclinical studies with respect to additional PEG-enhanced
compounds. We will continue to seek opportunities to develop and commercialize
other PEG-enhanced products on our own and through co-commercialization
partnerships.

      Inhaled Leuprolide

      As part of our strategic alliance with Nektar, we have agreed to jointly
develop up to three compounds using Nektar's pulmonary or super-critical fluid
platforms. The first compound currently under development is a Nektar
formulation of leuprolide acetate, a peptide analog used to treat prostate
cancer and endometriosis.

      Nektar is currently conducting preclinical studies on the compound that
will be used to file a U.S. IND. Nektar is responsible for all costs to bring
the product to the IND stage as well as formulation and manufacturing of the
product. We will be responsible for the clinical development, regulatory filings
and commercialization of the final product.

      Research and Development

      To date, our primary sources of new products have been our internal
research and development activities and the licensing of compounds from third
parties, such as ATG-FRESENIUS S. Research and development expenses for the
fiscal years ended June 30, 2003, 2002 and 2001 were approximately $21.0
million, $18.4 million and $13.1 million, respectively.

      Our research and development activities during fiscal 2003 concentrated
primarily on the Phase II clinical trials of PEG-Camptothecin, preclinical
studies, and continued research and development of our proprietary technologies.
We expect our research and development expenses for fiscal 2004 and beyond will
be at significantly higher levels as PEG-Camptothecin and ATG FRESENIUS S enter
late stage clinical trials and additional compounds enter clinical trials.

      Our internal research and development activities focus on applying our
proprietary PEG and SCA technologies to a pipeline of development candidates as
well as development of products using technology licensed from third parties
such as SkyePharma and Nektar.

      Proprietary Technologies

      PEG Technology

      Our proprietary PEG technology involves the covalent attachment of PEG to
therapeutic proteins or small molecules for the purpose of enhancing therapeutic
value. PEG is a relatively non-reactive and non-toxic polymer that is frequently
used in food and pharmaceutical products. We have demonstrated, both in our
marketed products and our products under development, that for some proteins and
small molecules, we can impart significant pharmacologic advantages over the
unmodified forms of the compound by modifying a compound using our PEG
technology.


                                       12
<PAGE>

      These advantages include:

            o     extended circulating life,

            o     lower toxicity,

            o     increased drug stability, and

            o     enhanced drug solubility.

                               [GRAPHIC OMITTED]

                     A depiction of a PEG-enhanced molecule.

      For years, we have applied and continually improved our PEG technology to
engineer macromolecules to improve the pharmacologic characteristics of
potential or existing macromolecule therapeutics. We modify macromolecules with
PEG for the purpose of prolonging half-life and reducing toxicities. In some
cases, PEG can render a macromolecule therapeutically effective, where the
unmodified form had only limited clinical utility. For example, some
macromolecules frequently induce an immunologic response rendering them
therapeutically ineffective. When PEG is attached, it disguises the
macromolecule and reduces recognition by the patient's immune system. PEG
conjugation can also reduce dosing frequency and delay clearance of the active
drug resulting in an improved therapeutic effect.

      We have also developed a PEG technology that allows us to apply PEG to
small molecules. We are currently applying this technology to develop
PEG-enhanced versions of anti-cancer compounds. Like macromolecules, many
anti-cancer compounds of potentially significant therapeutic value possess
undesired pharmacologic characteristics such as toxicity, poor solubility, and
limited half-life. The attachment of PEG to anti-cancer compounds extends their
circulatory life and, at the same time, greatly increases the solubility of
these compounds. We attach PEG to anti-cancer compounds by means of proprietary
chemistries that are designed to temporarily inactivate the compound, and then
release it over time in the proximity of the targeted tissue. By inactivating
and then reactivating the compound in the body we create a prodrug version of
such compounds. These attributes may significantly enhance the therapeutic value
of new and already marketed drugs with otherwise limited utility. We believe
that this technology has broad utility and that it can be applied to a wide
range of small molecules, such as:

      o     cancer chemotherapy agents,

      o     antibiotics,


                                       13
<PAGE>

      o     anti-fungals, and

      o     immunosuppressants.

      We possess significant expertise and intellectual property in the methods
by which PEG can be attached to a compound, the selection of appropriate sites
on the compound to which PEG is attached, and the amount and type of PEG used to
tailor the PEG technology to produce the desired results for the particular
substance being modified. If PEG is attached to the wrong site on a compound, or
if the PEG is linked with an inappropriate chemical linker, it can result in a
loss of the macromolecule's activity or therapeutic effect.

      SCA Technology

      Antibodies are proteins produced by the immune system in response to the
presence in the body of antigens, such as bacteria, viruses or other disease
causing agents. Antibodies of identical molecular structure that bind to a
specific target are called monoclonal antibodies. Over the past few years,
several monoclonal antibodies have been approved for therapeutic use and have
achieved significant clinical and commercial success. Much of the clinical
utility of monoclonal antibodies results from the affinity and specificity with
which they bind to their targets, as well as a long circulating life due to
their relatively large size and their so-called effector function. Monoclonal
antibodies, however, are not well suited for use in indications where a short
half-life is advantageous or where their large size inhibits them physically
from reaching the area of potential therapeutic activity.

      SCAs are genetically engineered proteins designed to expand on the
therapeutic and diagnostic applications possible with monoclonal antibodies.
SCAs have the binding specificity and affinity of monoclonal antibodies and, in
their native form, are about one-fifth to one-sixth of the size of a monoclonal
antibody, typically giving them very short half-lives. SCAs differ from
monoclonal antibodies in various respects, which may offer benefits for certain
applications:

      o     faster clearance from the body,

      o     greater tissue penetration for both diagnostic imaging and therapy,

      o     a significant decrease in immunogenicity when compared with
            mouse-based antibodies,

      o     easier and more cost effective scale-up for manufacturing when
            compared with monoclonal antibodies,

      o     enhanced screening capabilities which allow for the more rapid
            assessment of SCA proteins of desired specificity using high
            throughput screening methods, and

      o     the potential for non-parenteral application.


                                       14
<PAGE>


                               [GRAPHIC OMITTED]

      Comparison of a standard monoclonal antibody and a single-chain antibody.

      In addition to these benefits, fully human SCAs can be isolated directly
from human SCA libraries without the need for re-cloning or humanization
procedures. In specific formats, SCAs are also suitable for intracellular
expression allowing for their use, among other things, as inhibitors of gene
expression.

      We, along with numerous other academic and industrial laboratories, have
demonstrated through in vitro testing the binding specificity of dozens of SCAs.
We, in collaboration with the National Cancer Institute, have shown in published
preclinical studies that SCAs localize to specific tumors and rapidly penetrate
the tumors.

 SCAs Under Development

      During April 2002, we entered into a multi-year strategic collaboration
with Micromet, a private company based in Munich, Germany. Under the terms of
the agreement, Enzon and Micromet will combine their significant patent estates
and complementary expertise in single chain antibody technology. The
collaboration will focus on the development of two clinical product candidates
within the first 30 months of the collaboration. Together with Micromet, we have
established a new 25 person research and development unit in Micromet's facility
in Germany. Enzon and Micromet will share the costs of the collaboration
equally, as well as in any future revenues generated through the collaboration.

      To date, we have granted SCA product licenses to more than 15 companies,
including Baxter Healthcare and Eli Lilly. These product licenses generally
provide for upfront payments, milestone payments and royalties on sales of any
SCA products developed. Some of the areas being explored with SCAs are cancer
therapy, cardiovascular indications and AIDS.

      One of our licensees, Alexion Pharmaceuticals, Inc. ("Alexion"), is
developing an SCA directed against complement protein C5, which is a component
of the body's normal defense against foreign pathogens. Inappropriate complement
activation during cardiopulmonary bypass and myocardial infarction can lead to
clinical problems. In August of 2003, Alexion announced preliminary results of
its Phase III study in a multinational trial consisting of more than 3,000
patients undergoing coronary artery bypass graft ("CABG") surgery with
cardiopulmonary bypass. The primary endpoint in this trial was a composite of
the incidence of death or myocardial infarction, measured at 30 days

                                       15

<PAGE>

post-procedure, in patients undergoing CABG without concomitant valve surgery.
Although there was reduction in the primary endpoint, it was not achieved with
statistical significance. However, key pre-specified secondary endpoints
consisting of the same composite in the total study population, which included
all patients undergoing CABG with or without concomitant valve surgery, were
achieved. Several other pre-specified secondary endpoints were met as well.
Alexion and it's partner, Procter & Gamble Pharmaceuticals, are working on
completion of the final data analysis and plan to discuss the data with the FDA.

Licenses and Strategic Partnerships

      Schering-Plough Agreement

      In November 1990, we entered into an agreement with Schering-Plough under
which Schering-Plough agreed to apply our PEG technology to develop a modified
form of Schering-Plough's INTRON A. Schering-Plough is responsible for
conducting and funding the clinical studies, obtaining regulatory approval and
marketing and manufacturing the product worldwide on an exclusive basis and we
are entitled to receive royalties on worldwide sales of PEG-INTRON for all
indications. The royalty percentage to which we are entitled will be lower in
any country where a pegylated alpha-interferon product is being marketed by a
third party in competition with PEG-INTRON, where such third party is not
Hoffmann-La Roche.

      In June 1999, we amended our agreement with Schering-Plough, which
resulted in an increase in the effective royalty rate that we receive for
PEG-INTRON sales. In exchange, we relinquished our option to retain exclusive
U.S. manufacturing rights for this product. In addition, we granted
Schering-Plough a non-exclusive license under some of our PEG patents relating
to Branched or U-PEG technology. This license gave Schering-Plough the ability
to sublicense rights under these patents to any party developing a competing
interferon product. During August 2001, Schering-Plough, pursuant to a cross
license agreement entered into as part of the settlement of certain patent
lawsuits, granted Hoffmann-La Roche a sublicense under our branched PEG patents
to allow Hoffmann-La Roche to make, use, and sell its pegylated alpha-interferon
product, PEGASYS.

      Under this agreement, Schering-Plough was obligated to and has paid us a
total of $9.0 million in milestone payments, none of which are refundable.
Schering-Plough's obligation to pay us royalties on sales of PEG-INTRON
terminates, on a country-by-country basis, upon the later of the date the last
patent of ours to contain a claim covering PEG-INTRON expires in the country or
15 years after the first commercial sale of PEG-INTRON in such country.
Schering-Plough has the right to terminate this agreement at any time if we fail
to maintain the requisite liability insurance of $5.0 million. Either party may
terminate the agreement upon a material breach of the agreement by the other
party that is not cured within 60 days of written notice from the non-breaching
party or upon declaration of bankruptcy by the other party.

      Aventis License Agreements

      During 2002, we amended our license agreement with Aventis to reacquire
the rights to market and distribute ONCASPAR in the United States, Mexico,
Canada and the Asia/Pacific region. In return for the marketing and distribution
rights we paid Aventis $15.0 million and pay a 25% royalty on net sales of
ONCASPAR through 2014. The license agreement may be terminated by Aventis
earlier upon 60 days' notice if we fail to make the required royalty payments or
we decide to cease selling ONCASPAR. Following the expiration of the agreement
in 2014, all rights will revert back to Enzon, unless the agreement is
terminated earlier because we fail to make royalty payments or cease to sell
ONCASPAR. Prior to the amendment, Aventis was responsible for marketing and
distribution of ONCASPAR. Under the previous agreement, Aventis paid us a
royalty on net sales of ONCASPAR of 27.5% on annual sales up to $10.0 million
and 25% on annual sales exceeding $10.0 million. These royalty payments included
Aventis' cost of purchasing ONCASPAR from us under a supply agreement.


                                       16

<PAGE>

      The amended license agreement prohibits Aventis from making, using or
selling an asparaginase product in the U.S. or a competing PEG-asparaginase
product anywhere in the world until the later of the expiration of the agreement
or, if the agreement is terminated earlier, five years after termination. If we
cease to distribute ONCASPAR or if we fail to make the required royalty
payments, Aventis has the option to distribute the product in the territories
under the original license.

      MEDAC License Agreement

      In January 2003, we renewed an exclusive license to MEDAC to sell ONCASPAR
and any PEG-asparaginase product developed by us or MEDAC during the term of the
agreement in most of Europe and part of Asia. Our supply agreement with MEDAC
provides for MEDAC to purchase ONCASPAR from us at certain established prices.
Under the license agreement, MEDAC is responsible for obtaining additional
approvals and indications in the licensed territories, beyond the currently
approved hypersensitive indication in Germany. Under the agreement, MEDAC is
required to meet certain minimum purchase requirements. The term of the
agreement is for five years and will automatically renew for an additional five
years if MEDAC meets or exceeds certain diligence requirements and thereafter
the agreement will automatically renew for an additional two years unless either
party provides written notice of its intent to terminate the agreement at least
12 months prior to the scheduled expiration date. Following the expiration or
termination of the agreement, all rights granted to MEDAC will revert back to
Enzon.

      Fresenius Development and Supply Agreement

      In June 2003 we entered into a development and supply agreement with
Fresenius, which provides Enzon with exclusive development and distribution
rights in North America for the monoclonal antibody ATG-FRESENIUS S. The
agreement term is ten years, commencing upon FDA approval of the first
indication for ATG-FRESENIUS S, with an option to extend the term for an
additional ten years. The agreement may be terminated early by Enzon if it
determines the project not to be feasible. In addition, either party may
terminate the agreement early upon a material breach by the other party. If
Fresenius terminates the agreement upon a material breach by Enzon, Enzon will
be obligated to transfer to Fresenius any IND or marketing approval that Enzon
may have obtained. Further, Fresenius may terminate the agreement if Enzon fails
to satisfy the following diligence requirements: (i) enrollment of the first
patient for the first clinical trial within six months after the FDA has
approved an IND for the first indication; and (ii) receipt of marketing approval
in the U.S. within six years after the first IND is approved and the first
patient enrolled.

      Under this agreement, we are responsible for obtaining regulatory approval
of the product in the U.S. We will make milestone payments to Fresenius of $1.0
million upon approval of the first IND and $1.0 million upon our submission of a
biologics license application with the FDA, if any. Fresenius will be
responsible for manufacturing and supplying the product to us and we are
required to purchase all of the finished product from Fresenius for net sales of
the product in North America. We will purchase finished product at 40% of net
sales, which percentage can be reduced should certain defined sales targets be
exceeded. We are required to purchase a minimum of $2.0 million of product in
the first year after commercial introduction and $5.0 million in the second
year, with no minimum purchase requirements thereafter. Fresenius will supply
the product to us without charge for the clinical trials for the first
indication. For subsequent trials, we will purchase the clinical supplies from
Fresenius.


                                       17

<PAGE>

      Micromet AG

      In April 2002, we entered into a multi-year strategic collaboration with
Micromet, a private company based in Munich, Germany, to identify and develop
the next generation of antibody-based therapeutics, which will terminate on
September 30, 2004. Under the terms of the agreement, Enzon and Micromet will
combine their significant patent estates and complementary expertise in SCA and
PEG technology to create a leading platform of therapeutic product candidates
based on antibody fragments. Enzon and Micromet have established a new R&D unit
located at Micromet's research facility in Germany. During the first phase of
the collaboration we will focus on the generation of at least two clinical
product candidates in therapeutic areas of common strategic interest. Enzon and
Micromet will share equally the costs of research and development, and plan to
share the revenues generated from technology licenses and from future
commercialization of any developed products. Following the termination or
expiration of the agreement, the rights to antibody-based therapeutics
identified or developed by Enzon and Micromet will be determined in accordance
with the United States rules of inventorship. In addition, Enzon will acquire
the rights to any PEGylation inventions. The agreement can be terminated by
either party upon a material breach of the agreement by the other party.

      We hold core intellectual property in SCAs. These fundamental patents,
combined with Micromet's key patents in SCA linkers and fusion protein
technology, generate a compelling technology platform for SCA product
development. Enzon and Micromet have entered into a cross-license agreement
under our respective SCA intellectual property estates and expect to jointly
market our combined SCA technology to third parties. Micromet will be the
exclusive marketing partner and will institute a comprehensive licensing program
on behalf of the partnership, for which the parties will share equally in the
costs and revenues. Current licensees to Enzon and Micromet's SCA intellectual
property include Alexion, Baxter Healthcare and Eli Lilly, among others. Several
SCA molecules are in clinical trials. Alexion is currently performing final data
analysis of a pivotal Phase III clinical study of an SCA in cardiopulmonary
bypass surgery.

      In addition to our license and collaboration agreements with Micromet we
purchased an $8.3 million Micromet convertible note which bears interest at 3%
and is payable in March 2006. This note is convertible at our option into
Micromet common stock at a price of $1,015 per share.

      Nektar Therapeutics (Formerly Inhale Therapeutic Systems, Inc.)

      In January 2002, we entered into a broad strategic alliance with Nektar,
formerly Inhale Therapeutic Systems, Inc. that includes the following
components:

      o     The companies entered into a product development agreement to
            jointly develop three products to be specified over time using
            Nektar's Enhance(TM) pulmonary delivery platform and
            SEDS(TM) supercritical fluids platform. Nektar will be responsible
            for formulation development, delivery system supply, and in some
            cases, early clinical development. We will have responsibility for
            most clinical development and commercialization. This agreement
            terminates in January 2007 unless terminated earlier by either party
            upon 90 days notice of a material breach or 15 days notice of a
            payment default. Upon termination of the agreement, the obligations
            of the parties to conduct development activities will expire, but
            such termination shall not affect rights of either party that have
            accrued (e.g., with respect to the ownership of intellectual
            property or the right to certain payments) prior thereto.

      o     The two companies will also explore the development of single-chain
            antibody (SCA) products for pulmonary administration.

      o     We have entered into a cross-license agreement with Nektar under
            which each party has crosslicensed to the other party certain
            patents. We also granted to


                                       18
<PAGE>

            Nektar the right to grant sub-licenses under certain of our PEG
            patents to third parties. We will receive a royalty or a share of
            profits on final product sales of any products that use our patented
            PEG technology. We anticipate that we will receive 0.5% or less of
            Hoffmann-La Roche's sales of PEGASYS, which represents equal profit
            sharing with Nektar on this product. There are currently two PEG
            products licensed through our Nektar partnership in late stage
            clinical trials, MACUGEN, for age-related macular degeneration and
            diabetic macular edema, and CDP-870, an anti-TNF therapy for
            rheumatoid arthritis, both of which are being developed by Pfizer.
            We retain the right to use all of our PEG technology and certain of
            Nektar's PEG technology for our own product portfolio, as well as
            those products we develop in co-commercialization collaborations
            with third parties. This agreement expires upon the later of the
            expiration of the last licensed patent or the date the parties are
            no longer required to pay royalties. Either party may terminate the
            agreement upon a material breach of the agreement by the other party
            that is not cured within 90 days of the receipt of written notice
            from the non-breaching party or upon the declaration of bankruptcy
            by the other party.

      o     We purchased $40 million of newly issued Nektar convertible
            preferred stock in January 2002. The preferred stock is convertible
            into Nektar common stock at a conversion price of $22.79 per share.
            In the event Nektar's common stock price three years from the date
            of issuance of the preferred stock or earlier in certain
            circumstances is less than $22.79, the conversion price will be
            adjusted down, although in no event will it be less than $18.23 per
            share. Conversion of the preferred stock into common stock can occur
            anywhere from 1 to 4 years following the issuance of the preferred
            stock or earlier in certain circumstances. Under the cost method of
            accounting, investments are carried at cost and are adjusted only
            for other-than-temporary declines in fair value, distributions of
            earnings and additional investments. As a result of the continued
            decline in the price of Nektar's common stock, we determined during
            the three months ended December 31, 2002 that the decline in the
            value of our investment in Nektar was other than temporary.
            Accordingly, we recorded a write down of the carrying value of its
            investment in Nektar, which resulted in a non-cash charge of $27.2
            million. The adjustment was calculated based on an assessment of the
            fair value of the investment at that time.

      o     The two companies also agreed in January 2002 to a settlement of the
            patent infringement suit we filed in 1998 against Nektar's
            subsidiary, Shearwater Polymers, Inc. Nektar has a license under the
            contested patents pursuant to the cross-license agreement. We
            received a one-time payment of $3.0 million from Nektar to cover
            expenses incurred in defending our branched PEG patents.

    SkyePharma Agreements

      In January 2003, we entered into a strategic alliance with SkyePharma, PLC
based on a broad technology access agreement. The two companies will draw on
their combined drug delivery technology and expertise to jointly develop up to
three products for future commercialization. These products will be based on
SkyePharma's proprietary platforms in the areas of oral, injectable and topical
drug delivery, supported by technology to enhance drug solubility and Enzon's
proprietary PEG modification technology, for which Enzon received a $3.5 million
technology access fee. SkyePharma will receive a $2.0 million milestone payment
for each product based on its own proprietary technology that enters Phase II
clinical development. Certain research and development costs related to the
technology alliance will be shared equally, as will future revenues generated
from the commercialization of any jointly-developed products.


                                       19
<PAGE>

      Effective December 31, 2002, we also licensed the North American rights to
SkyePharma's DEPOCYT(R), an injectable chemotherapeutic approved for the
treatment of patients with lymphomatous meningitis. Under the terms of the
agreement, we paid SkyePharma a license fee of $12.0 million. SkyePharma
manufactures DEPOCYT and Enzon purchases finished product at 35% of net sales,
which percentage can be reduced should a defined sales target be exceeded. We
have recorded the $12.0 million license fee as an intangible asset, which is
being amortized over a ten year period.

      We are required to purchase minimum levels of finished product for
calendar year 2003 equal to 90% of the previous year's sales of DEPOCYT by
SkyePharma and finished product equal to $5.0 million in net sales for each
subsequent calendar year ("Minimum Annual Purchases"). SkyePharma is also
entitled to a milestone payment of $5.0 million if Enzon's sales of the product
exceed a $17.5 million annual run rate for four consecutive quarters and an
additional milestone payment of $5.0 million if Enzon's sales exceed an
annualized run rate of $25.0 million for four consecutive quarters. We are also
responsible for a $10.0 million milestone payment if the product receives
approval for all neoplastic meningitis prior to December 31, 2006. This
milestone payment will be incrementally reduced if the approval is received
subsequent to December 31, 2006 to a minimum payment of $5.0 million for an
approval after December 31, 2007. Enzon's license is for an initial term of ten
years and is automatically renewable for successive two-year terms thereafter.
Either party may terminate the agreement early upon a material breach by the
other party, which breach the other party fails to cure within 60 days after
receiving notice thereof. Further, SkyePharma will be entitled to terminate the
agreement early if we fail to satisfy our Minimum Annual Purchases. In addition,
we will be entitled to terminate the agreement early if a court or government
agency renders a decision or issues an order that prohibits the manufacture, use
or sale of the product in the U.S. If a therapeutically equivalent generic
product enters the market and DEPOCYT's market share decreases, the parties will
enter into good faith discussions in an attempt to agree on a reduction in our
payment obligations to SkyePharma and a fair allocation of the economic burdens
resulting from the market entry of the generic product. If we are unable to
reach an agreement within 30 days, then either party may terminate the
agreement, which termination will be effective 180 days after giving notice
thereof. After termination of the agreement, the parties will have no further
obligation to each other, except the fulfillment of obligations that accrued
prior thereto (e.g., deliveries, payments, etc.). In addition, for six months
after any such termination, we will have the right to distribute any quantity of
product we purchased from SkyePharma prior to termination.

      Elan Manufacturing Agreement

      On November 22, 2002, we acquired the North American rights and
operational assets associated with the development, manufacture, sales and
marketing of ABELCET from Elan for $360.0 million plus acquisition costs. This
transaction is being accounted for as a business combination. As a part of the
ABELCET acquisition, we entered into a long-term manufacturing and supply
agreement with Elan, whereby we continue to manufacture two products for Elan,
ABELCET and MYOCET. Under the terms of the ABELCET acquisition agreement, Elan
has retained the rights to market ABELCET in any markets outside of the US,
Canada and Japan. ABELCET is approved for use in approximately 26 countries for
primary and/or refractory invasive fungal infections.

      Our agreement with Elan requires that we supply Elan with ABELCET and
MYOCET through November 21, 2011. For the period from November 22, 2002 until
June 30, 2004, we are supplying ABELCET and MYOCET at fixed transfer prices
which approximate our manufacturing cost. From July 1, 2004 to the termination
of the agreement, we will supply these products at our manufacturing cost plus
fifteen percent.

      The agreement also provides that until June 30, 2004, Enzon will calculate
the actual product manufacturing costs on an annual basis and, to the extent
that this amount is greater than the respective


                                       20
<PAGE>

transfer prices, Elan will reimburse Enzon for such differences. Conversely, if
such actual manufacturing costs are less than the transfer price, Enzon will
reimburse Elan for such differences. In addition, for the period from closing of
the acquisition until June 30, 2004, Elan is responsible for reimbursing Enzon
for Elan's share of the plant's excess capacity. This calculation is based on
Elan's portion of the total products manufactured at the plant.

Sales and Marketing

      We have a United States sales and marketing team comprised of a hospital
based sales force which markets ABELCET and a specialty oncology sales force
which markets ONCASPAR and DEPOCYT. We have provided exclusive marketing rights
to Schering-Plough for PEG-INTRON worldwide and to MEDAC GmbH for ONCASPAR in
most of Europe and Asia. We do not market any products through the use of direct
to consumer advertising.

      ABELCET is utilized in the United States by over 2,300 hospitals, clinics
and alternate care sites who treat patients with invasive fungal infections. In
the United States, ABELCET is sold primarily to drug wholesalers who, in turn,
sell the product to hospitals and certain other third parties. In some cases,
ABELCET is sold by us directly to institutions. We maintain contracts with a
majority of our customers which allows those customers to purchase product
directly from wholesalers. These contracts generally provide for pricing based
on annual purchase volumes.

      ABELCET is currently being marketed by Elan in Canada under an agreement
entered into as part of the ABELCET acquisition. Under the terms of this
agreement, Elan's Canadian sales force is marketing ABELCET on our behalf in
Canada and we receive a royalty based on those sales. This arrangement will
continue until November 2003 at which time certain Elan sales personnel will be
hired by us.

      We market ONCASPAR and DEPOCYT in the U.S. through our specialty oncology
sales force to hospital oncology centers, oncology clinics and oncology
physicians. We utilize an independent distributor in the US who sells the
products to these customers.

      We are marketing ADAGEN on a worldwide basis. We utilize independent
distributors in certain territories, including the United States, Europe and
Australia.

Manufacturing and Raw Materials

      In the manufacture of ABELCET, we couple amphotericin B with DMPC and DMPG
(two lipid materials) to produce an injectable lipid complex formulation of
amphotericin B. We have two suppliers of amphotericin B and have entered into a
long-term supply agreement with our primary supplier. We also have two suppliers
of the lipid materials, neither of which is under a long term supply agreement.
We believe that the current levels of inventory that we maintain, coupled with
having two suppliers of materials, should provide us with sufficient time to
find an alternative supplier, if it becomes necessary.

      In the manufacture of ADAGEN and ONCASPAR, we couple activated forms of
PEG with unmodified proteins. We do not have a long-term supply agreement for
the raw polyethylene glycol material that we use in the manufacturing of our PEG
products. Instead, we maintain a level of inventory, which we believe should
provide us sufficient time to find an alternate supplier of PEG, in the event it
becomes necessary, without materially disrupting our business.

      ADAGEN and ONCASPAR use our early PEG technology which is not as advanced
as the PEG technology used in PEG-INTRON and our products under development.
Due, in part, to certain limitations of using our earlier PEG technology, we
have had and will likely continue to have certain manufacturing problems with
ADAGEN and ONCASPAR.


                                       21
<PAGE>

      Manufacturing and stability problems required us to implement voluntarily
recalls for one batch of ADAGEN in March 2001 and certain batches of ONCASPAR in
June 2002.

      During 1998, we began to experience manufacturing problems with one of our
FDA-approved products, ONCASPAR. The problems were due to increased levels of
white particulates in batches of ONCASPAR, which resulted in an increased
rejection rate for this product. During fiscal 1999, we agreed with the FDA to
temporary labeling and distribution restrictions for ONCASPAR and instituted
additional inspection and labeling procedures prior to distribution. During May
1999, the FDA required us to limit distribution of ONCASPAR to only those
patients who are hypersensitive to native L-asparaginase. As a result of certain
manufacturing changes we made, the FDA withdrew this distribution restriction in
November 1999.

      In July 1999, the FDA conducted an inspection of our manufacturing
facility in connection with our product license for ADAGEN. Following that
inspection, the FDA documented several deviations from Current Good
Manufacturing Practices, known as cGMP, in a Form 483 report. We provided the
FDA with a corrective action plan. In November 1999, the FDA issued a warning
letter citing the same cGMP deviations listed in the July 1999 Form 483, but it
also stated that the FDA was satisfied with our proposed corrective actions. As
a result of the deviations, the FDA decided not to approve product export
requests from us for ONCASPAR until it determined that all noted cGMP deviations
were either corrected or in the process of being corrected. This restriction was
removed in August 2000.

      Since January 2000, the FDA and the MCA, the European equivalent of the
FDA, have conducted follow-up inspections as well as routine inspections of our
manufacturing facility related to ABELCET, ONCASPAR and ADAGEN. Following
certain of these inspections, the FDA issued eight Form 483 reports, citing
deviations from cGMP. We received the most recent Form 483 report in June 2003.
We have or are in the process of responding to such reports with corrective
action plans.

Patents and Intellectual Property Rights

      Patents are very important to us in establishing the proprietary rights to
the products we have developed or licensed. The patent position of
pharmaceutical or biotechnology companies, including our position, can be
uncertain and involve complex legal, scientific and factual questions. If our
intellectual property positions are challenged, invalidated or circumvented, or
if we fail to prevail in potential future intellectual property litigation, our
business could be adversely affected. We have been issued 118 patents in the
U.S., many of which have foreign counterparts. These patents, without
extensions, are expected to expire beginning in 2004 through 2022. We have also
filed and currently have pending 48 patent applications in the U.S. Under our
license agreements, we have access to large portions of Micromet's and Nektar's
patent estates as well as a small number of individually licensed patents. Of
the patents owned or licensed by us, 7 relate to PEG-INTRON, 28 relate to
ABELCET, 11 relate to PROTHECAN and 3 relate to DEPOCYT. Although we believe
that our patents provide adequate protection for the conduct of our business, we
cannot assure you that such patents:

   o  will be of substantial protection or commercial benefit to us,

   o  will afford us adequate protection from competing products, or

   o  will not be challenged or declared invalid.

      We also cannot assure you that additional United States patents or foreign
patent equivalents will be issued to us.

      Patents for individual products extend for varying periods according to
the date of patent filing or grant and the legal term of patents in the various
countries where patent protection is obtained. The actual protection afforded by
a patent, which can vary from country to country, depends upon the type of
patent, the scope of its coverage and the availability of legal remedies in the
country.


                                       22
<PAGE>

      The expiration of a product patent or loss of patent protection resulting
from a legal challenge normally results in significant competition from generic
products against the covered product and, particularly in the U.S., can result
in a significant reduction in sales of the pioneer product. In some cases,
however, we can continue to obtain commercial benefits from:

   o  product manufacturing trade secrets;

   o  patents on uses for products;

   o  patents on processes and intermediates for the economical manufacture of
      the active ingredients;

   o  patents for special formulations of the product or delivery mechanisms and
      conversion of the active ingredient to OTC products.

      The effect of product patent expiration or loss also depends upon:

   o  the nature of the market and the position of the product in it;

   o  the growth of the market;

   o  the complexities and economics of manufacture of the product; and

   o  the requirements of generic drug laws.

      The patent covering our original PEG technology, which we had licensed
from Research Corporation Technologies, Inc., contained broad claims covering
the attachment of PEG to polypeptides. However, this United States patent and
its corresponding foreign patents have expired. Based upon the expiration of the
Research Corporation patent, other parties may make, use, or sell products
covered by the claims of the Research Corporation patent, subject to other
patents, including those which we hold. We have obtained and intend to continue
to pursue patents with claims covering improved methods of attaching or linking
PEG to therapeutic compounds. We also have obtained patents relating to the
specific composition of the PEG-modified compounds that we have identified or
created. We will continue to seek such patents as we develop additional
PEG-enhanced products. We cannot assure you that any of these patents will
enable us to prevent infringement by unauthorized third parties or that
competitors will not develop competitive products outside the protection that
may be afforded by our patents.

      We are aware that others have also filed patent applications and have been
granted patents in the United States and other countries with respect to the
application of PEG to proteins and other compounds. Owners of any such patents
may seek to prevent us or our collaborators from making, using or selling our
products.

      During January 2002, we settled a patent infringement suit we had brought
against Shearwater PolymersCorporation Inc., a company that produces the
Branched PEG, or U-PEG, used in Hoffmann-La Roche's product, PEGASYS, a
PEG-modified version of its alpha-interferon product ROFERON-A. The settlement
was part of a broad strategic alliance we formed with Nektar Therapeutic Systems
Inc., Shearwater Corporation's parent corporation, in which Nektar agreed to pay
us $3.0 million to cover our expenses incurred in defending our Branched PEG
patents and pay us 50% of any revenues it receives for the manufacture of
Hoffmann-La Roche's PEGASYS. In addition, Enzon and Nektar agreed to cross
license certain of their PEG intellectual property estates to each other. Also,
Nektar has the right to sublicense certain of our PEG patents to third parties
and we will receive a royalty or a share of profit on final product sales. We
retained the rights to use our PEG patents for our own proprietary products and
products we may develop with co-commercialization partners.

      During August 2001, Schering-Plough granted a sublicense to Hoffmann-La
Roche under our Branched PEG patents to allow Hoffmann-La Roche to make, use and
sell its pegylated alpha-interferon product, PEGASYS as part of the settlement
of a patent infringement lawsuit related to PEG-


                                       23
<PAGE>

INTRON. During August 2001, we dismissed a patent infringement suit we had
brought against Hoffmann-La Roche relating to PEGASYS as a result of the
sublicense by Schering-Plough of our Branched PEG patents for PEGASYS to
Hoffmann-La Roche.

      In the field of SCA proteins, we have several United States and foreign
patents and pending patent applications, including a patent granted in August
1990 covering the genes needed to encode SCA proteins.

      In November 1993, Curis Inc. (formerly known as Creative BioMolecules
Inc.) signed cross license agreements with us in the field of our SCA protein
technology and Curis' Biosynthetic Antibody Binding Site protein technology. In
July 2001, Curis reported that it had entered into a purchase and sale agreement
with Micromet AG, a German Corporation, pursuant to which Curis assigned its
single chain polypeptide technology to Micromet. In April 2002, we entered into
a cross-license agreement with Micromet for our respective SCA intellectual
property and have decided to jointly market such intellectual property with
Micromet.

      Through our acquisition of ABELCET, we acquired several U.S. and Canadian
patients claiming the use and manufacture of ABELCET.

      In general, Enzon has obtained licenses from various parties which it
deems to be necessary or desirable for the manufacture, use, or sale of its
products. These licenses generally require Enzon to pay royalties to the parties
on product sales. In addition, other companies have filed patent applications or
have been granted patents in areas of interest to Enzon. There can be no
assurance any licenses required under such patents will be available for license
on acceptable terms or at all.

      We also sell our products under trademarks that we consider in the
aggregate to be of material importance. Trademark protection continues in some
countries for as long as the mark is used and, in other countries, for as long
as it is registered. Registrations generally are for fixed, but renewable,
terms.

Government Regulation

      The FDA and comparable regulatory agencies in state and local
jurisdictions and in foreign countries impose substantial requirements on the
clinical development, manufacture and marketing of pharmaceutical products.
These agencies and other federal, state and local entities regulate research and
development activities and the testing, manufacture, quality control, safety,
effectiveness, labeling, storage, record keeping, approval and promotion of our
products. All of our products will require regulatory approval before
commercialization. In particular, therapeutic products for human use are subject
to rigorous preclinical and clinical testing and other requirements of the
Federal Food, Drug, and Cosmetic Act and the Public Health Service Act,
implemented by the FDA, as well as similar statutory and regulatory requirements
of foreign countries. Obtaining these marketing approvals and subsequently
complying with ongoing statutory and regulatory requirements is costly and time
consuming. Any failure by us or our collaborators, licensors or licensees to
obtain, or any delay in obtaining, regulatory approval or in complying with
other requirements, could adversely affect the commercialization of products
that we are then developing and our ability to receive product or royalty
revenues.

      The steps required before a new drug or biological product may be
distributed commercially in the United States generally include:

      o     conducting appropriate preclinical laboratory evaluations of the
            product's chemistry, formulation and stability, and animal studies
            to assess the potential safety and efficacy of the product,

      o     submitting the results of these evaluations and tests to the FDA,
            along with manufacturing


                                       24
<PAGE>

            information and analytical data, in an Investigational New Drug
            Application, or IND,

      o     making the IND effective after the resolution of any safety or
            regulatory concerns of the FDA,

      o     obtaining approval of Institutional Review Boards, or IRBs, to
            introduce the drug or biological product into humans in clinical
            studies,

      o     conducting adequate and well-controlled human clinical trials that
            establish the safety and efficacy of the drug or biological product
            candidate for the intended use, typically in the following three
            sequential, or slightly overlapping stages:

                  Phase I. The drug or biologic is initially introduced into
                  healthy human subjects or patients and tested for safety, dose
                  tolerance, absorption, metabolism, distribution and excretion,

                  Phase II. The drug or biologic is studied in patients to
                  identify possible adverse effects and safety risks, to
                  determine dose tolerance and the optimal dosage, and to
                  collect initial efficacy data,

                  Phase III. The drug or biologic is studied in an expanded
                  patient population at multiple clinical study sites, to
                  confirm efficacy and safety at the optimized dose, by
                  measuring a primary endpoint established at the outset of the
                  study,

      o     submitting the results of preliminary research, preclinical studies,
            and clinical studies as well as chemistry, manufacturing and control
            information on the drug or biological product to the FDA in a New
            Drug Application, or NDA, for a drug product, or a Biologics License
            Application, or BLA, for a biological product, and

      o     obtaining FDA approval of the NDA or BLA prior to any commercial
            sale or shipment of the drug or biological product.

      An NDA or BLA must contain, among other things, data derived from
nonclinical laboratory and clinical studies which demonstrate that the product
meets prescribed standards of safety, purity and potency, and a full description
of manufacturing methods. The biological product may not be marketed in the
United States until a biological license is issued.

      The approval process can take a number of years and often requires
substantial financial resources. The results of preclinical studies and initial
clinical trials are not necessarily predictive of the results from large-scale
clinical trials, and clinical trials may be subject to additional costs, delays
or modifications due to a number of factors, including the difficulty in
obtaining enough patients, clinical investigators, drug supply, or financial
support. The FDA has issued regulations intended to accelerate the approval
process for the development, evaluation and marketing of new therapeutic
products intended to treat life-threatening or severely debilitating diseases,
especially where no alternative therapies exist. If applicable, this procedure
may shorten the traditional product development process in the United States.
Similarly, products that represent a substantial improvement over existing
therapies may be eligible for priority review with a target approval time of six
months. Nonetheless, approval may be denied or delayed by the FDA or additional
trials may be required. The FDA also may require testing and surveillance
programs to monitor the effect of approved products that have been
commercialized, and the agency has the power to prevent or limit further
marketing of a product based on the results of these post-marketing programs.
Upon approval, a drug product or biological product may be marketed only in
those dosage forms and for those indications approved in the NDA or BLA,
although information about off-label indications may be distributed in certain
circumstances.


                                       25
<PAGE>

      In addition to obtaining FDA approval for each indication to be treated
with each product, each domestic drug product manufacturing establishment must
register with the FDA, list its drug products with the FDA, comply with Current
Good Manufacturing Practices and permit and pass inspections by the FDA.
Moreover, the submission of applications for approval may require additional
time to complete manufacturing stability studies. Foreign establishments
manufacturing drug products for distribution in the United States also must list
their products with the FDA and comply with Current Good Manufacturing
Practices. They also are subject to periodic inspection by the FDA or by local
authorities under agreement with the FDA.

      Any products manufactured or distributed by us pursuant to FDA approvals
are subject to extensive continuing regulation by the FDA, including
record-keeping requirements and a requirement to report adverse experiences with
the drug. In addition to continued compliance with standard regulatory
requirements, the FDA also may require post-marketing testing and surveillance
to monitor the safety and efficacy of the marketed product. Adverse experiences
with the product must be reported to the FDA. Product approvals may be withdrawn
if compliance with regulatory requirements is not maintained or if problems
concerning safety or efficacy of the product are discovered following approval.

      The Federal Food, Drug, and Cosmetic Act also mandates that drug products
be manufactured consistent with Current Good Manufacturing Practices. In
complying with the FDA's regulations on Current Good Manufacturing Practices,
manufacturers must continue to spend time, money and effort in production,
record-keeping, quality control, and auditing to ensure that the marketed
product meets applicable specifications and other requirements. The FDA
periodically inspects drug product manufacturing facilities to ensure compliance
with Current Good Manufacturing Practices. Failure to comply subjects the
manufacturer to possible FDA action, such as:

      o     warning letters,

      o     suspension of manufacturing,

      o     seizure of the product,

      o     voluntary recall of a product,

      o     injunctive action, or

      o     possible civil or criminal penalties.

      To the extent we rely on third parties to manufacture our compounds and
products, those third parties will be required to comply with Current Good
Manufacturing Practices.

      Even after FDA approval has been obtained, and often as a condition to
expedited approval, further studies, including post-marketing studies, may be
required. Results of post-marketing studies may limit or expand the further
marketing of the products. If we propose any modifications to the product,
including changes in indication, manufacturing process, manufacturing facility
or labeling, an NDA or BLA supplement may be required to be submitted to the
FDA.

      Products manufactured in the United States for distribution abroad will be
subject to FDA regulations regarding export, as well as to the requirements of
the country to which they are shipped. These latter requirements are likely to
cover the conduct of clinical trials, the submission of marketing applications,
and all aspects of product manufacture and marketing. Such requirements can vary
significantly from country to country. As part of our strategic relationships
our collaborators may be responsible for the foreign regulatory approval process
of our products, although we may be legally liable for noncompliance.


                                       26
<PAGE>

      We are also subject to various federal, state and local laws, rules,
regulations and policies relating to safe working conditions, laboratory and
manufacturing practices, the experimental use of animals and the use and
disposal of hazardous or potentially hazardous substances, including radioactive
compounds and infectious disease agents, used in connection with our research
work. Although we believe that our safety procedures for handling and disposing
of such materials comply with current federal, state and local laws, rules,
regulations and policies, the risk of accidental injury or contamination from
these materials cannot be entirely eliminated.

      We cannot predict the extent of government regulation which might result
from future legislation or administrative action. In this regard, although the
Food and Drug Administration Modernization Act of 1997 modified and created
requirements and standards under the Federal Food, Drug, and Cosmetic Act with
the intent of facilitating product development and marketing, the FDA is still
in the process of implementing the Food and Drug Administration Modernization
Act of 1997. Consequently, the actual effect of these developments on our
business is uncertain and unpredictable.

      Moreover, we anticipate that Congress, state legislatures and the private
sector will continue to review and assess controls on health care spending. Any
such proposed or actual changes could cause us or our collaborators to limit or
eliminate spending on development projects and may otherwise impact us. We
cannot predict the likelihood, nature or extent of adverse governmental
regulation that might result from future legislative or administrative action,
either in the United States or abroad. Additionally, in both domestic and
foreign markets, sales of our proposed products will depend, in part, upon the
availability of reimbursement from third-party payors, such as government health
administration authorities, managed care providers, private health insurers and
other organizations. Significant uncertainty often exists as to the
reimbursement status of newly approved health care products. In addition,
third-party payors are increasingly challenging the price and cost-effectiveness
of medical products and services. There can be no assurance that our proposed
products will be considered cost-effective or that adequate third-party
reimbursement will be available to enable us to maintain price levels sufficient
to realize an appropriate return on our investment in product research and
development.

      PEG-INTRON was approved in the European Union and the United States for
the treatment of hepatitis C in May 2000 and January 2001, respectively. ABELCET
was approved in the United States in November 1995 and in Canada in September
1997. ONCASPAR was approved for marketing in the United States and Germany in
1994 and in Canada in December 1997 for patients with acute lymphoblastic
leukemia who are hypersensitive to native forms of L-asparaginase, and in Russia
in April 1993 for therapeutic use in a broad range of cancers. ADAGEN was
approved by the FDA in March 1990. DEPOCYT received U.S. approval in April 1999.
Except for these approvals, none of our other products have been approved for
sale and use in humans in the United States or elsewhere.

      With respect to patented products, delays imposed by the government
approval process may materially reduce the period during which we will have the
exclusive right to exploit them.

Competition

      Competition in the biopharmaceutical industry is intense and based
significantly on scientific and technological factors. These factors include the
availability of patent and other protection of technology and products, the
ability to commercialize technological developments and the ability to obtain
governmental approval for testing, manufacturing and marketing. We compete with
specialized biopharmaceutical firms in the United States, Europe and elsewhere,
as well as a growing number of large pharmaceutical companies that are applying
biotechnology to their operations. These companies, as well as academic
institutions, governmental agencies and private research organizations, also
compete with us in recruiting and retaining highly qualified scientific
personnel and consultants.


                                       27
<PAGE>

      The IV anti-fungal market in which ABELCET competes is generally
represented by four classes of drugs: conventional amphotericin B (CAB),
lipid-based amphotericin B formulations, triazoles and echinocandins.

      The lipid-based formulations of amphotericin B include ABELCET,
AMBISOME(R) (marketed by Fujisawa/Gilead) and AMPHOTEC(R) (marketed by
Intermune, Inc.). These formulations provide the efficacy of CAB while limiting
the toxicities that are inherent in CAB usage. Empirical antifungal therapy with
conventional amphotericin B or lipid-based amphotericin B has been the current
standard of care for the treatment of fungal infections and to reduce invasive
fungal infections in patients with neutropenia and persistent fever.

      The triazoles, which include DIFLUCAN(R), (marketed by Pfizer),
SPORONOX(R), (marketed by Janssen Pharmaceuticals), and VFEND(R), (also marketed
by Pfizer), have the least reported incidence of side effects versus all other
antifungals. Triazoles are generally thought to be limited by a narrower
spectrum of activity and have issues with drug-to-drug interactions and acquired
resistance. The majority of triazole units sold in the US are attributed to
DIFLUCAN. DIFLUCAN in particular is often used in "less compromised" patients as
prophylaxis or as first-line empirical therapy. DIFLUCAN patients are often
switched to an amphotericin B product once a clinician is convinced that a
patient has a fungal infection. VFEND is a second-generation triazole approved
in May 2002 and is available in intravenous and oral formulations. VFEND carries
a broader spectrum of activity than first generation triazoles and is indicated
for the treatment of invasive aspergillosis, scedosporium apiospermum and
fusariosis in patients intolerant of, or refractory to, other therapy. However,
it still carries with it a narrower spectrum of activity versus CAB and the
lipid amphotericin B formulations, while also retaining the same potential for
drug-to-drug interactions and resistance issues as the first generation
triazoles.

      The newest class of products to enter the IV anti-fungal market are the
echinocandins. These exhibit fewer of the CAB side effects but, like the
triazoles, have a more limited spectrum of activity and less clinical data
supporting widespread use across a variety of fungal pathogens. CANCIDAS(R)
(marketed by Merck) was approved in the US in January 2001 and is the first
echinocandin to receive FDA approval. CANCIDAS is indicated for the treatment of
refractory invasive aspergillosis and esophageal candidiasis.

      We are aware that other companies are conducting research on chemically
modified therapeutic proteins and that certain companies are modifying
pharmaceutical products, including proteins, by attaching PEG. In particular
Amgen has received FDA approval for NEULASTA(TM), a pegylated version of
NEUPOGEN(R). Other than PEG-INTRON and our ONCASPAR and ADAGEN products, and
Hoffmann-La Roche's PEGASYS and NEULASTA, we are not aware of any PEG-modified
therapeutic proteins that are currently available commercially for therapeutic
use. Nevertheless, other drugs or treatments that are currently available or
that may be developed in the future, and which treat the same diseases as those
that our products are designed to treat, may compete with our products.

      Prior to the development of ADAGEN, the only treatment available to
patients afflicted with ADA-deficient SCID was a bone marrow transplant.
Completing a successful transplant depends upon finding a matched donor, the
probability of which is low. Researchers at the National Institutes of Health,
or NIH, have been treating SCID patients with gene therapy, which if
successfully developed, would compete with, and could eventually replace ADAGEN
as a . The theory behind gene therapy is that cultured T-lymphocytes that are
genetically engineered and injected back into the patient will express adenosine
deaminase, the deficient enzyme in people afflicted with ADA-deficient SCID,
permanently and at normal levels. To date, patients in gene therapy clinical
trials have not been able to stop ADAGEN treatment and, therefore, the trials
have been inconclusive.


                                       28
<PAGE>

      Current standard treatment of patients with acute lymphoblastic leukemia
includes administering unmodified L-asparaginase along with the drugs
vincristine, prednisone and daunomycin. Studies have shown that long-term
treatment with L-asparaginase increases the disease-free survival in high risk
patients. ONCASPAR, our PEG-modified L-asparaginase product, is used to treat
patients with acute lymphoblastic leukemia who are hypersensitive to unmodified
forms of L-asparaginase. Currently, there is one unmodified form of
L-asparaginase (ELSPAR(R)) available in the United States and several available
in Europe. We believe that ONCASPAR has two advantages over these unmodified
forms of L-asparaginase: increased circulating blood life and generally reduced
immunogenicity.

      The current market in the U.S. and Europe for PEGylated interferon alpha
products is highly competitive. PEG-INTRON, marketed by Schering-Plough,
competes directly with Hoffmann-La Roche's PEGASYS. Schering-Plough and Hoffman
La-Roche have been the major competitors in the global alpha interferon market
since the approval of the unmodified alpha-interferon products, INTRON A and
ROFERON-A. Based on current published prescription data, PEG-INTRON accounts for
the majority of prescriptions written in the United States. Since its launch,
PEGASYS has taken market share away from PEG-INTRON and the over-all market for
pegylated alpha-interferon in the treatment of Hepatitis C has not increased
sufficiently so as to offset the effect the increasing PEGASYS sales have had on
sales of PEG-INTRON. As a result, quarterly sales of PEG-INTRON and the
royalties we receive on those sales have flattened or declined in recent
quarters. We cannot assure you that PEGASYS will not continue to gain market
share at the expense of PEG-INTRON, which could result in lower PEG-INTRON sales
and royalties to us.

      DEPOCYT competes against generic unmodified or Ara-C cytarabine, as well
as methotrexate, another generic drug. Both of these drugs have been used for
oncology treatment for decades and DEPOCYT does not have the same level of
clinical experience as these drugs. Clinical trials have demonstrated, however,
that DEPOCYT provides certain clinical advantages versus generic cytarabine. In
a randomized, multi-center trial of patients with lymphomatous meningitis,
treated either with 50 mg of DEPOCYT administered every 2 weeks or standard
intrathecal chemotherapy administered twice a week, results showed that DEPOCYT
achieved a complete response rate of 41% compared with a complete response rate
of 6% for unencapsulated cytarabine. In this study, complete response was
prospectively defined as (i) conversion of positive to negative CSF cytology and
(ii) the absence of neurologic progression. DEPOCYT has also demonstrated an
increase in the time to neurologic progression of 78.5 days for DEPOCYT versus
42 days for unencapsulated cytarabine. There are no controlled trials, however,
that demonstrate a clinical benefit resulting from this treatment, such as
improvement in disease related symptoms, increased time to disease progression,
or increased survival.

      There are several technologies which compete with our SCA protein
technology, including chimeric antibodies, humanized antibodies, human
monoclonal antibodies, recombinant antibody Fab fragments, low molecular weight
peptides and mimetics. These competing technologies can be categorized into two
areas:

      o     those modifying monoclonal antibodies to minimize immunological
            reaction to a foreign protein, which is the strategy employed with
            chimerics, humanized antibodies and human monoclonal antibodies, and

      o     those creating smaller portions of monoclonal antibodies, which are
            more specific to the target and have fewer side effects, as is the
            case with Fab fragments and low molecular weight peptides.

      We believe that the smaller size of our SCA proteins should permit better
penetration into the tumor, result in rapid clearance from the blood and cause a
significant decrease in the immunogenic


                                       29
<PAGE>

problems associated with conventional monoclonal antibodies. A number of
organizations have active programs in SCA proteins.We believe that our patent
position on SCA proteins will likely require companies that have not licensed
our SCA protein patents to obtain licenses under our patents in order to
commercialize their products, but we cannot assure you this will prove to be the
case.

Employees

      As of June 30, 2003, we employed 318 persons, including 30 persons with
Ph.D. or MD degrees. At that date, 76 employees were engaged in research and
development activities, 134 were engaged in manufacturing, 105 were engaged in
sales, marketing and administration. None of our employees are covered by a
collective bargaining agreement. All of our employees are covered by
confidentiality agreements. We consider our relations with our employees to be
good.

Item 2. Properties

      As part of the ABELCET transaction, we assumed ownership of a 56,000
square foot manufacturing facility in Indianapolis, Indiana which produces
ABELCET along with other products we manufacture for others on a contract basis.
Our Indianapolis facility is not subject to any mortgage.

      The following are all of the facilities that we currently lease:

<TABLE>
<CAPTION>
                                                         Approx.         Approx.
                                  Principal              Square           Annual             Lease
       Location                  Operations              Footage           Rent            Expiration
       --------                  ----------              -------           ----            ----------
<S>                       <C>                            <C>            <C>            <C>
20 Kingsbridge Road       Research & Development         56,000         $581,000(1)     July 31, 2021
Piscataway, NJ

300 Corporate Ct.         Manufacturing                  24,000          183,000(2)    October 31, 2012
S. Plainfield, NJ

685 Route 202/206         Administrative                 25,000          470,000(3)    January 31, 2008
Bridgewater, NJ
</TABLE>

(1)   Under the terms of the lease, annual rent increases over the remaining
      term of the lease from $581,000 to $773,000.

(2)   Under the terms of the lease, annual rent increases over the remaining
      term of the lease from $183,000 to $228,000.

(3)   Under the terms of the lease, annual rent increases over the remaining
      term of the lease from $470,000 to $638,000.

      We believe that our facilities are well maintained and generally adequate
for our present and future anticipated needs.

Item 3. Legal Proceedings

      There is no pending material litigation to which we are a party or to
which any of our property is subject.

Item 4. Submission of Matters to a Vote of Security Holders

      None.


                                       30
<PAGE>

                                     PART II

Item 5. Market for the Registrant's Common Equity and Related Stockholder
        Matters

      Our common stock is traded on the NASDAQ National Market under the trading
symbol "ENZN".

      The following table sets forth the high and low sale prices for our common
stock for the years ended June 30, 2003 and 2002, as reported by the NASDAQ
National Market. The quotations shown represent inter-dealer prices without
adjustment for retail markups, markdowns or commissions, and may not necessarily
reflect actual transactions.
                                                  High           Low
                                                  ----           ---
           Year Ended June 30, 2003
                First Quarter                    $25.00        $16.46
                Second Quarter                    20.90         15.50
                Third Quarter                     19.32         11.00
                Fourth Quarter                    15.68         11.16

           Year Ended June 30, 2002
                First Quarter                     67.92         42.77
                Second Quarter                    67.15         50.10
                Third Quarter                     57.86         40.75
                Fourth Quarter                    44.70         22.12

      As of September 24, 2003, there were 1,603 holders of record of our common
stock.

      We have never declared or paid any cash dividends on our common stock and
do not anticipate paying any cash dividends in the foreseeable future. We
currently intend to retain future earnings to fund the development and growth of
our business.

      The following table provides additional information on the Company's
equity-based compensation plans as of June 30, 2003 (in thousands, except per
share data):

<TABLE>
<CAPTION>
                                                                                    Number of securities
                                                                                   remaining available for
                             Number of securities to       Weighted-average         future issuance under
                             be issued upon exercise      exercise price of       equity compensation plans
                             of outstanding options,     outstanding options,       (excluding securities
Plan Category                 warrants and rights(a)    warrants and rights(b)    reflected in column a)(c)
-------------------------    -----------------------    ---------------------     -------------------------
<S>                                   <C>                      <C>                           <C>
Equity compensation
  plans approved by
  security holders                    3,938                    $35.02                        751
Equity compensation
  plans not approved by
  security holders                       --                        --                         --
                                      -----                    ------                        ---
Total                                 3,938                    $35.02                        751
                                      =====                    ======                        ===
</TABLE>


                                       31
<PAGE>

Item 6. Selected Financial Data

      Set forth below is our selected financial data for the five fiscal years
ended June 30, 2003.

Consolidated Statement of Operations Data ( in thousands, except per share
data):

<TABLE>
<CAPTION>
                                                                      Years Ended June 30,
                                                   ------------------------------------------------------------
                                                      2003        2002        2001         2000         1999
                                                   ---------   ---------    ---------    ---------    ---------
<S>                                                <C>         <C>          <C>          <C>          <C>
Consolidated Statements of operations data:
  Total revenues                                   $ 146,406   $  75,805    $  31,588    $  17,018    $  13,158
  Cost of sales                                       28,521       6,078        3,864        4,888        4,310
  Research and development expenses                   20,969      18,427       13,052        8,383        6,836
  Other operating expenses                            67,019      16,687       11,796       12,956        8,133
  Operating income (loss)                             29,897      34,613        2,876       (9,209)      (6,121)
  Interest and dividend income                         8,942      18,681        8,401        2,943        1,145
  Interest expense                                    19,828      19,829          275            4            8
  Other income (expense), net                         26,938       3,218           11          (36)          65
  Income tax provision (benefit)                         223      (9,123)        (512)          --           --
  Net earnings available for common stockholders      45,726      45,806       11,525       (6,306)      (4,919)
  Net earnings per common shares
    Basic                                          $    1.06   $    1.07    $    0.28       ($0.17)      ($0.14)
    Diluted                                        $    1.05   $    1.04    $    0.26       ($0.17)      ($0.14)

<CAPTION>

                                                                       Years Ended June 30,
                                                    -----------------------------------------------------------
                                                      2003        2002         2001         2000         1999
                                                    --------    --------     --------     --------     --------
<S>                                                  <C>         <C>          <C>          <C>           <C>
Consolidated Balance Sheet data:
  Current assets                                     152,847     221,462      455,521       57,581       31,639
  Current liabilities                                 36,533      19,701        9,410        8,172        7,978
  Total assets                                       728,566     610,748      549,675      130,252       34,916
  Long-term obligations                              400,449     400,552      401,276        1,118        1,363
  Total stockholders' equity                         291,584     190,495      138,989      120,962       25,575
</TABLE>

Item 7. Management's Discussion and Analysis of Financial Condition and Results
        of Operations

Acquisition of ABELCET Business

      On November 22, 2002, we acquired the North American rights and
operational assets associated with the development, manufacture, sales and
marketing of ABELCET(R) (Amphotericin B Lipid Complex Injection) ("the ABELCET
Product Line") from Elan Corporation, plc ("Elan") for $360.0 million plus
approximately $9.3 million of acquisition costs. This transaction was accounted
for as a business combination.

      Unless otherwise indicated, the discussions in Management's Discussion and
Analysis of Financial Condition and Results of Operations for the year ended
June 30, 2003 and financial condition at June 30, 2003 include the results of
operations of the ABELCET Product Line commencing from November 23, 2002.
Comparisons are made to the results of operations for the years ended June 30,
2002 and 2001, and financial condition as of June 30, 2002, which include only
the historical results of Enzon Pharmaceuticals, Inc.


                                       32
<PAGE>

Liquidity and Capital Resources

      Total cash reserves, including cash, cash equivalents and marketable
securities, as of June 30, 2003 were $153.3 million, as compared to $485.1
million as of June 30, 2002. The decrease is primarily due to $369.3 million
paid as a result of the acquisition of the ABELCET Product Line acquisition
(including $9.3 million for acquisition costs). We invest our excess cash
primarily in United States government-backed securities and investment-grade
corporate debt securities.

      During the year ended June 30, 2003, net cash generated from operating
activities was $60.5 million, primarily reflecting our net income of $45.7
million and the effect of non-cash amounts for merger termination fee of $34.6
million, write-down of carrying value of investments of $27.2 million,
depreciation and amortization of $13.8 million, deferred taxes of $4.4 million
and lower working capital of $12.8 million. During the year ended June 30, 2002,
net cash generated from operating activities was $30.8 million, primarily
reflecting our net income of $45.8 million and the effect of non-cash amounts
for depreciation and amortization, deferred taxes of $9.0 million and increased
working capital of $6.0 million. During fiscal 2001, net cash generated from
operating activities was $5.6 million, primarily reflecting our net income of
$11.5 million partly offset by increased working capital of $5.9 million.

      Cash used for investing activities totaled $108.7 million for the year
ended June 30, 2003 compared to $232.3 million and $120.0 million for the years
ended June 30, 2002 and 2001, respectively. Cash used for investing activities
during fiscal 2003 consisted of $11.2 million of capital assets, $369.3 million
for the acquisition of ABELCET Business, and $12.2 million of the purchase of
DEPOCYT(R) product, partly offset by the net proceeds from marketable securities
liquidation totaling $284.0 million. Investing activities for the year ended
June 20, 2002 related to purchases of $48.3 million of cost method investments,
$15.0 million of product rights and $7.5 million of capital assets partly offset
by net purchase of securities aggregating $161.5 million. Investing activities
for the year ended June 30, 2001 related to net purchases of $117.9 million of
marketable securities and $2.1 million of capital assets.

      Net cash provided by financing activities for the years ended June 30,
2003, 2002, and 2001 was $1.1 million, $5.1 million, and $392.7 million,
respectively. Financing activities for the year ended June 30, 2003 were
primarily related to proceeds from common stock issued under our stock options
plans and payment of preferred stock dividends. Financing activity for the year
ended June 30, 2002 was related to proceeds from common stock issued under our
stock option plans. For the year ended June 30, 2001, financing activities
related to the issuance of $400.0 million of 4.5% Convertible Subordinated
Notes, net of related debt issuance cost and to proceeds from common stock
issued under our stock option plans.

      On February 19, 2003, we entered into an agreement and plan of merger with
NPS Pharmaceuticals, Inc. ("NPS"). On June 4, 2003, the merger agreement was
terminated. In accordance with the mutual termination agreement between the two
companies, we received 1.5 million shares of NPS common stock. The termination
agreement imposes certain restrictions with respect to the transferability of
the underlying shares by stipulating the maximum number of shares that can be
transferred each month after the registration statement relating to the shares
is declared effective. Considering such restrictions, 1.1 million shares were
valued at the fair value of NPS stock on June 4, 2003 in accordance with SFAS
115, Accounting for Certain Investments in Debt and Equity Securities (SFAS 115)
of $26.8 million and the balance of 375,000 shares were considered as restricted
stock as defined under the scope exception provisions of SFAS 115. The
restricted stock was valued at $7.8 million by applying a 12% discount on the
related fair value based on a valuation performed by an independent third-party
consulting firm. Total consideration received aggregated $34.6 million. We also
recorded $7.7 million in costs incurred related to the proposed merger with NPS
(primarily


                                       33
<PAGE>

investment banking, legal and accounting fees).The net gain of $26.9 million was
recorded as other income in the Statement of Operations for the year ended June
30, 2003.

      In August 2003, we entered into a Zero Cost Protective Collar arrangement
with a financial institution to reduce the exposure associated with the 1.5
million shares of NPS common stock. By entering into this equity collar
arrangement and taking into consideration the underlying put and call option
strike prices, terms are structured so that we have ensured that our investment
in NPS stock, when combined with the value of the equity collar, should secure
ultimate cash proceeds in the range of 85%-108% of the market value per share of
$24.67 on the date the collar was entered into. The collar is considered a
derivative hedging instrument and as such, we will periodically measure its fair
value and recognize the derivative as an asset or a liability. The change in
fair value will be recorded in other comprehensive income or in the statement of
operations depending on its effectiveness. When the underlying shares become
unrestricted and freely tradable, we are required to deliver as posted
collateral a corresponding number of shares of NPS Common Stock with the
financial institution. The Collar will mature in four separate three-month
intervals beginning November 2004 through August 2005 at which time we will
receive the proceeds from the sale of the securities. The amount due at each
maturity date will be determined based on the market value of NPS common stock
on such maturity date. The contract requires us to maintain a minimum cash
balance of $30.0 million and additional collateral up to $10.0 million (as
defined) under certain circumstances with the financial institution. The strike
prices of the put and call options are subject to certain adjustments in the
event we receive a dividend from NPS.

      While we believe that our cash, cash equivalents and investments will be
adequate to satisfy our capital needs for the foreseeable future, we may seek
additional financing, such as through future offerings of equity or debt
securities or agreements with collaborators with respect to the development and
commercialization of products, to fund future operations and potential
acquisitions. We cannot assure you, however, that we will be able to obtain
additional funds on acceptable terms, if at all.

Contractual Obligations

      Our major outstanding contractual obligations relate to our operating
leases, our convertible debt and our license agreements with collaborative
partners.

      As of June 30, 2003, we had $400.0 million of convertible subordinated
notes outstanding. The notes bear interest at an annual rate of 4.5%. Interest
is payable on January 1 and July 1 of each year beginning January 2, 2002.
Accrued interest on the notes was $9.0 million as of June 30, 2003 (which was
paid on July 1, 2003). The holders may convert all or a portion of the notes
into common stock at any time on or before July 1, 2008. The notes are
convertible into our common stock at a conversion price of $70.98 per share,
subject to adjustment in certain events. The notes are subordinated to all
existing and future senior indebtedness. On or after July 7, 2004, we may redeem
any or all of the notes at specified redemption prices, plus accrued and unpaid
interest to the day preceding the redemption date. The notes will mature on July
1, 2008 unless earlier converted, redeemed at our option or redeemed at the
option of the note-holder upon a fundamental change, as described in the
indenture for the notes. Neither we nor any of our subsidiaries are subject to
any financial covenants under the indenture. In addition, neither we nor any of
our subsidiaries are restricted under the indenture from paying dividends,
incurring debt or issuing or repurchasing our securities.

      In February 2003, we amended the lease for our manufacturing facility in
South Plainfield, New Jersey. The term of the lease was extended until October
2012.

      In March 2002, we entered into a new lease for a 19,000 square feet
facility located in Bridgewater, NJ that will serve as our corporate
headquarters. In November 2002, we amended the lease to add 6,000 square feet of
space. The lease has a term of 5 years, followed by one five year


                                       34
<PAGE>

renewal option period. The future minimum lease payments are approximately $2. 9
million throughout the five year term of the lease. Other commitments for
operating leases total $17.0 million.

      We have a multi-year strategic collaboration with Micromet AG, a private
company to combine our patent estates and complementary expertise in
single-chain antibody (SCA) technology to create a leading platform of
therapeutic products based on antibody fragments. We have an obligation to fund
50% of research and development expenses for activities relating to SCA for the
collaboration through September 2004.

      We have a multi-year strategic alliance with Nektar whereby the companies
have entered into a product developement agreement to jointly develop three
products to be specified over time using Nektar's Enhance pulmonary delivery
platform and SEDS supercritical fluids platform. We have an obligation to fund
most clinical developement and commercialization costs for the collaboration
through January 2007.

      During January 2003, we entered into a strategic alliance with SkyePharma
PLC ("SkyePharma") based on a broad technology access agreement. The two
companies will draw on their combined drug delivery technology and expertise to
jointly develop up to three products for future commercialization. Under the
agreement we received a non-refundable upfront technology access fee of $3.5
million. Research and development costs related to the jointly developed
products will be shared equally based on an agreed upon annual budget, and
future revenues generated from the commercialization of jointly-developed
products will also be shared equally. In addition, SkyePharma is entitled to a
$2.0 million milestone payment for each product based on its own proprietary
technology that enters Phase II clinical development.

      Effective December 31, 2002, we obtained an exclusive license for the
right to sell, market and distribute SkyePharma's DEPOCYT product. We paid a
license fee of $12.0 million for the North American rights to DEPOCYT in January
2003. Under the agreement we are required to purchase minimum levels of finished
product for calendar 2003 of 90% of the previous year sales by SkyePharma and a
sales level of $5.0 million for each subsequent calendar year. SkyePharma is
also entitled to a milestone payment of $5.0 million if our sales of the product
exceed a $17.5 million annualized run rate for four consecutive quarters and an
additional milestone payment of $5.0 million if Enzon's sales exceed an
annualized run rate of $25 million for four consecutive quarters. We are also
responsible for a $10.0 million milestone payment if the product receives
approval for all neoplastic meningitis prior to December 31, 2006. This
milestone payment is incrementally reduced if the approval is received
subsequent to December 31, 2006 to a minimum payment of $5.0 million for an
approval after December 31, 2007.

      During June 2003 we licensed the North American right to develop and
commercialize ATG-FRESENIUS S from Fresenius Biotech ("Fresenius"). Under the
agreement we are required to pay Fresenius two separate milestone payments of
$1.0 million each, the first payment upon FDA approval of an Investigational New
Drug Application and the second at the submission of a Biologics License
Application. Upon the commercialization of the product in North America, we will
purchase the finished product from Fresenius at a specified percentage of net
sales.

      Contractual obligations represent future cash commitments and liabilities
under agreements with third parties, and exclude contingent liabilities for
which we cannot reasonably predict future payment.


                                       35
<PAGE>

      The following chart represents our contractual cash obligations aggregated
by type as of June 30, 2003 (in millions):

<TABLE>
<CAPTION>
                                                               Payments due by period
                                             ---------------------------------------------------------

Contractual Obligations and                             Less than                            More than
Commercial Commitments                        Total       1 Year   2 - 3 Years  4 - 5 Years   5 Years
----------------------                        -----       ------   -----------  -----------   -------
<S>                                          <C>         <C>         <C>          <C>         <C>
Long-term debt including current portion     $ 400.0     $    --     $    --      $    --     $ 400.0
Operating lease obligations                     17.0         1.4         2.8          2.7        10.1
Purchase obligations                            18.9         1.0         1.0           --        16.9
Interest due on long-term debt                  99.0        18.0        36.0         36.0         9.0
                                             -------     -------     -------      -------     -------
Totals                                       $ 534.9     $  20.4     $  39.8      $  38.7     $ 436.0
                                             =======     =======     =======      =======     =======
</TABLE>

Results of Operations

Fiscal Years Ended June 30, 2003, 2002, and 2001

      Revenues. Total revenues for the year ended June 30, 2003 were $146.4
million compared to $75.8 million for the year ended June 30, 2002 and $31.6
million for the year ended June 30, 2001. The components of revenues are net
sales and certain contract manufacturing revenues, royalties we earn on the sale
of our products by others and contract revenues.

      Net sales and manufacturing revenue increased by 207% to $68.0 million for
the year ended June 30, 2003, as compared to $22.2 million for the year ended
June 30, 2002. The increase in net sales was due to our commencing of sales of
ABELCET in North America in November 2002 and DEPOCYT(R) in January 2003, and
increased sales of ADAGEN(R) and ONCASPAR(R). During November 2002, we acquired
the North American rights and operational assets associated with the
development, manufacture, sales and marketing for ABELCET from Elan. During the
year ended June 30, 2003, we recorded $37.1 million of sales related to the
ABELCET Product Line, of which $28.3 million related to sales of the product in
North America and $8.8 million related to the shipment of the product which we
manufactured and sold to Elan for the international market and other contract
manufacturing revenue. During December 2002, we obtained an exclusive license
for the right to sell, market and distribute SkyePharma's DEPOCYT. During the
year ended June 30, 2003, we recorded DEPOCYT sales of $2.5 million. Sales of
ONCASPAR increased by 42% to $12.4 million for the year ended June 30, 2003 from
$8.7 million for the year ended June 30, 2002 as a result of our reacquisition
in June 2002 of the rights to market and distribute ONCASPAR in certain
territories which we had previously licensed to Aventis. Sales of ADAGEN
increased by 19% for the year ended June 30, 2003 to $16.0 million, as compared
to $13.5 million for the year ended June 30, 2002 due to an increase in the
number of patients receiving the drug.

      Net sales increased by 7% to $22.2 million for the year ended June 30,
2002 from $20.8 million for the year ended June 30, 2001. The increase was due
to increased ONCASPAR sales due to the lifting during the prior year of all FDA
distribution and labeling restrictions that were in place for a portion of
fiscal 2001. During the year ended June 30, 2001, the FDA gave final approval to
manufacturing changes which we made to correct certain manufacturing problems,
and all previously imposed restrictions were lifted. Net sales of ADAGEN were
$13.5 million for the year ended June 30, 2002 as compared to $13.4 million in
fiscal 2001.

      Royalties for the year ended June 30, 2003 increased to $77.6 million
compared to $53.3 million in the prior year. The increase was primarily due to
the increased sales by Schering-Plough, our marketing partner, of PEG-INTRON in
combination with REBETOL in the U.S. and increased sales of


                                       36
<PAGE>

PEG-INTRON in
Europe.

      Royalties for the year ended June 30, 2002 increased to $53.3 million as
compared to $8.3 million for the year ended June 30, 2001. The increase was
primarily due to the commencement of sales of PEG-INTRON in combination with
REBETOL in the U.S. and increased sales of PEG-INTRON in Europe. PEG-INTRON
received marketing approval for use in combination with REBETOL for the
treatment of chronic hepatitis C in the European Union in March 2002 and in the
U.S. in August 2001. Schering-Plough launched PEG-INTRON as a combination
therapy with REBETOL in the U.S. in October 2001.

      Due to the competitive pressure from the launch of Hoffman-LaRoche's
PEGASYS, a pegylated version of its interferon product ROFERON-A in December
2002, we believe royalties from sales of PEG-INTRON will decrease or remain flat
for the first half of fiscal 2004. Since its launch, PEGASYS has taken market
share away from PEG-INTRON and the overall market for pegylated alpha-interferon
in the treatment of Hepatitis C has not increased sufficiently so as to offset
the effect the increasing PEGASYS sales have had on sales of PEG-INTRON. As a
result, quarterly sales of PEG-INTRON and the royalties we receive on those
sales have flattened or declined in recent quarters. We cannot assure you that
PEGASYS will not continue to gain market share at the expense of PEG-INTRON
which could result in lower PEG-INTRON sales and royalties to us. Based on our
focused marketing efforts for ABELCET we believe that we have been able to
stabilize the pressure from the introduction of new products in the antifungal
market and that the product is now back on a growth pattern. We expect sales of
DEPOCYT, which are currently running at an annual rate of approximately $5.0
million, to increase over the coming year. We expect ADAGEN and ONCASPAR sales
to grow over the next year at similar levels as achieved during the previous
twelve months. However, we cannot assure you that any particular sales levels of
ABELCET, ADAGEN, ONCASPAR, DEPOCYT or PEG-INTRON will be achieved or maintained.

      Contract revenues for the year ended June 30, 2003 increased to $811,000
as compared to $293,000 the prior year. The increase was related to revenue
received from the licensing of our PEG technology to SkyePharma. In connection
with such licensing, we received a payment of $3.5 million which is being
recognized into income based on the term of the related agreement.

      Contract revenues for the year ended June 30, 2002 decreased by $2.3
million to $293,000, as compared to $2.6 million in the year ended June 30,
2001. The decrease was related primarily to a $2.0 million milestone payment
from our development partner Schering-Plough which was earned to a result of the
FDA's approval of PEG-INTRON during the year ended June 30, 2001.

      We had export sales and royalties recognized on export sales of $40.2
million for the year ended June 30, 2003, $26.3 million for the year ended June
30, 2002 and $11.2 million for the year ended June 30, 2001. Of these amounts,
sales in Europe and royalties recognized on sales in Europe, were $35.5 million
for the year ended June 30, 2003, $24.9 million for the year ended June 30, 2002
and $10.2 million for the year ended June 30, 2001.

      Cost of Sales and Manufacturing Revenue. Cost of sales and manufacturing
revenue, as a percentage of net sales and manufacturing revenue, increased to
42% for the year ended June 30, 2003 as compared to 27% for the year ended June
30, 2002. The increase was due to higher cost of sales for ABELCET due to
certain purchase accounting adjustments to the acquired inventory totaling $8.6
million and as a result of unabsorbed capacity costs. The increase was also due
to our reacquisition of ONCASPAR, which resulted in increased cost of sales for
the product. Under the reacquisition agreement, we made a $15.0 million payment
to Aventis in June 2002 and we pay Aventis a 25% royalty on net sales of
ONCASPAR. The royalty and amortization of the $15.0 million payment over a 14
year period are included in cost of sales for the product, accounting for an
increase in cost of sales as a percentage of sales.


                                       37
<PAGE>

      Cost of sales and manufacturing revenue, as a percentage of sales, for the
year ended June 30, 2002 was 27% as compared to 19% in 2001. This increase was
due to lower cost of sales during the previous fiscal year as certain finished
goods, which had previously been reserved for due to previously disclosed
manufacturing problems related to ONCASPAR, were cleared and sold in fiscal
2001.

      Research and Development. Research and development expenses increased by
$2.5 million or 14% to $20.9 million for the year ended June 30, 2003, as
compared to $18.4 million for the same period last year. The increase was due to
increased spending of approximately $1.7 million related to our single-chain
antibody (SCA) collaboration with Micromet AG and increased spending of
approximately $1.3 million on our PEG-Camptothecin development program, offset
by a reduction of approximately $500,000 due to our January 2003 decision to
suspend its Phase I PEG-paclitaxel program.

      Research and development expenses for the year ended June 30, 2002
increased by 41% to $18.4 million as compared to 13.1 million in 2001. The
increase was primarily due to the clinical advancement and related clinical
trial costs for PEG-camptothecin and PEG-paclitaxel and increased payroll and
related expenses.

      Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the year ended June 30, 2003 increased by $14.0
million to $30.5 million as compared to $16.5 million in 2002. The increase was
primarily due to: (i) increased sales and marketing expense of approximately
$10.8 million related to the ABELCET acquisition and the sales force acquired
from Elan; (ii) increased sales and marketing expense of approximately $4.1
million due to the reacquisition of marketing and distribution rights for
ONCASPAR and establishment of an oncology sales force; and (iii) increased
general and administrative personnel and related costs of approximately
$626,000. These increases were partially offset by a reduction in legal expense
of approximately $1.5 million related to the settlement of the prior year's
patent litigation with Nektar. During January 2002, we settled our patent
infringement suit with Nektar and entered into a broad based technology
collaboration.

      Selling, general and administrative expenses for the year ended June 30,
2002 increased by $4.7 million to $16.5 million, as compared to $11.8 million in
2001. The increase was primarily due to increased payroll and related
expenditures for additional personnel and costs related to the identification
and review of potential strategic alliances to gain access to technologies and
products.

      Amortization. Amortization expense increased to $9.2 million for the year
ended June 30, 2003 as compared to $142,000 for the prior year as a result of
the intangible assets acquired in connection with the ABELCET acquisition during
November 2002 and the DEPOCYT license fee in January 2003. Amortization of
intangible assets is provided over their estimated lives ranging from 3-15 years
on a straight-line basis.

      Write-down of Investment. In January 2002, we entered into a broad
strategic alliance with Nektar to co-develop products utilizing both companies'
proprietary drug delivery platforms. As a part of this agreement, we purchased
$40.0 million of newly issued Nektar preferred convertible stock which is
currently convertible into Nektar common stock at a conversion price of $22.79
per share. Under the cost method of accounting, investments are carried at cost
and are adjusted only for other-than-temporary declines in fair value,
distributions of earnings and additional investments. As a result of the
continued decline in the price of Nektar's common stock, we determined during
the three months ended December 31, 2002 that the decline in the value of its
investment in Nektar was other than temporary. Accordingly, we recorded a write
down of the carrying value of its investment in Nektar, which resulted in a
non-cash charge of $27.2 million. The adjustment was calculated based on an
assessment of the fair value of the investment.


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<PAGE>

      The estimated fair value of the Nektar preferred stock was determined by
multiplying the number of shares of common stock that would be received based on
the conversion rate in place as of the date of the agreement, ($22.79 per share)
by the closing price of Nektar common stock on December 31, 2002, less a 10%
discount to reflect the fact that the shares were not convertible as of December
31, 2002, the valuation date.

      Other Income (expense). Interest and dividend income decreased by $9.8
million to $8.9 million for the year ended June 30, 2003, as compared to $18.7
million for the prior year. The decrease was primarily due to a reduction in our
interest-bearing investments resulting from our purchase of the North American
rights to ABELCET in November 2002 for a cash payment of $360.0 million, plus
acquisition costs, as well as a decrease in interest rates. Interest expense
remained unchanged from the prior year. The majority of interest expense is
related to $400.0 million in 4.5% convertible subordinated notes, which were
outstanding for both periods.

      In connection with the termination of the merger agreement with NPS we
received total consideration aggregating $34.6 million. We also recorded $7.7
million in costs incurred related to the proposed merger with NPS (primarily
investment banking, legal and accounting fees). The net gain of $26.9 million
was recorded as other income in the Statement of Operations for the year ended
June 30, 2003.

      Other income (expense) decreased to $41,000 for the year ended June 30,
2003 as compared to $3.2 million for the prior year, primarily due to a $3.0
million payment received from Nektar in the prior year in connection with the
settlement of the patent infringement suit against Nektar's subsidiary
Shearwater Corporation, Inc. This one-time payment was reimbursement for
expenses we incurred in defending our branched PEG patent.

      Other income (expense) decreased by $6.0 million to $2.1 million for the
year ended June 30, 2002. Interest and dividend income increased by $10.3
million to $18.7 million for the year ended June 30, 2002 as compared to $8.4
million for the prior year. The increase in interest income was attributable to
an increase in interest bearing investments, primarily due to the issuance of
$400.0 million of 4.5% convertible subordinated notes during June 2001. Interest
expense increased to $19.8 million from $275,000 for the prior year due to the
issuance of the $400.0 million in 4.5% convertible subordinated notes in June
2001. Other income increased to $3.2 million for the year ended June 30, 2002 as
compared to $11,000 in the prior year, primarily due to a $3.0 million payment
from Nektar in connection with the settlement of the patent infringement suit
against Nektar's subsidiary Shearwater Corporation, Inc. This one-time payment
was reimbursement for expenses we incurred in defending our branched PEG patent.

      Income Taxes. For the year ended June 30, 2003, we recognized net tax
expense of approximately $223,000. Certain tax expense, primarily related to the
NPS settlement in June 2003, was offset by the reduction in the valuation
allowance based on our net operating loss carryforwards expected to be utilized
in the future. We believe it is more likely than not that we will be able to
utilize the majority of our net operating loss carryforwards and tax credits,
and we therefore recognized $67.5 million of net deferred tax assets. Of these
assets, approximately $54.7 million related to net operating losses from stock
option exercises which, pursuant to SFAS No. 109, Accounting for Income Taxes,
was recorded as an increase in additional paid in capital and not as a credit to
income tax expense. The remaining benefit from the reduction of the valuation
allowance totaled $11.2 million and was recorded as an income tax benefit in the
Statement of Operations. During the year ended June 30, 2003, we sold
approximately $6.0 million of our state net operating loss carryforwards for
proceeds of $474,000 (which was recorded as a tax benefit) and we purchased
approximately $11.8 million of gross state net operating loss carryforwards for
$1.1 million. We expect to record a 40% effective tax rate in future years.


                                       39
<PAGE>

      In fiscal 2002, we had a net tax benefit of $9.1 million. We recognized a
tax provision in fiscal 2002 which represents our anticipated Alternative
Minimum Tax liability based on our fiscal 2003 taxable income. This tax
provision was offset by the sale of a portion of our net operating losses to the
state of New Jersey. We sold approximately $10.8 million of our state net
operating loss carry forwards for proceeds of $857,000. The fiscal 2002 tax
provision (benefit) also included a reduction of a portion of our valuation
allowance on our deferred tax assets based on future taxable income expected in
fiscal 2003. For the year ended June 30, 2001, we recognized a tax provision
which represented our anticipated Alternative Minimum Tax liability based on our
fiscal 2001 taxable income. The tax provision was offset by the sale of a
portion of our net operating losses to the state of New Jersey. During the year
ended June 30, 2001, we sold approximately $9.3 million of our state net
operating loss carry forwards and recognized a tax benefit of $728,000 from this
sale.

Critical Accounting Policies

      In December 2001, the SEC requested that all registrants discuss their
most "critical accounting policies" in Management's Discussion and Analysis of
Financial Condition and Results of Operations. The SEC indicated that a
"critical accounting policy" is one which is both important to the portrayal of
the company's financial condition and results of operations and requires
management's most difficult, subjective or complex judgments, often as a result
of the need to make estimates about the effect of matters that are inherently
uncertain.

      Our consolidated financial statements are presented in accordance with
accounting principles that are generally accepted in the United States. All
professional accounting standards effective as of June 30, 2003 have been taken
into consideration in preparing the consolidated financial statements. The
preparation of the consolidated financial statements requires estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues,
expenses and related disclosures. Some of those estimates are subjective and
complex, and, consequently, actual results could differ from those estimates.
The following accounting policies have been highlighted as significant because
changes to certain judgments and assumptions inherent in these policies could
affect our consolidated financial statements.

      Revenues from product sales and manufacturing revenue are recognized at
the time of shipment and a provision is made at that time for estimated future
credits, chargebacks, sales discounts, rebates and returns. These sales
provision accruals are presented as a reduction of the accounts receivable
balances. We continually monitor the adequacy of the accruals by comparing the
actual payments to the estimates used in establishing the accruals. We ship
product to customers primarily FOB shipping point and utilizes the following
criteria to determine appropriate revenue recognition: pervasive evidence of an
arrangement exists, delivery has occurred, selling price is fixed and
determinable and collection is reasonably assured.

      Royalties under our license agreements with third parties are recognized
when earned through the sale of the product by the licensor. We do not
participate in the selling or marketing of products for which it receives
royalties.

      Contract revenues are recorded as the earnings process is completed.
Non-refundable milestone payments that represent the completion of a separate
earnings process are recognized as revenue when earned, upon the occurrence of
contract-specified events and when the milestone has substance. Non-refundable
payments received upon entering into license and other collaborative agreements
where we have has continuing involvement are recorded as deferred revenue and
recognized ratably over the estimated service period.

      Under the asset and liability method of Statement of Financial Accounting
Standards ("SFAS") No. 109, deferred tax assets and liabilities are recognized
for the estimated future tax


                                       40
<PAGE>

consequences attributable to differences between financial statement carrying
amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. A valuation allowance on
net deferred tax assets is provided for when it is more likely than not that
some portion or all of the deferred tax assets will not be realized. We have
significant net deferred tax assets, primarily related to net operating loss
carryforwards, and continue to analyze what level of the valuation allowance is
needed.

      We assess the carrying value of our cost method investments in accordance
with SFAS No. 115 and SEC Staff Accounting Bulletin No. 59. An impairment
write-down is recorded when a decline in the value of an investment is
determined to be other-than-temporary. These determinations involve a
significant degree of judgment and are subject to change as facts and
circumstances changes.

      In accordance with the provisions of SFAS No. 142, goodwill and intangible
assets determined to have an indefinite useful life acquired in a purchase
business combination, are not subject to amortization, are tested at least
annually for impairment, and are tested for impairment more frequently if events
and circumstances indicate that the asset might be impaired. Goodwill is
reviewed for impairment by comparing the carrying value to its fair value.
Recoverability of amortizable intangible assets is determined by comparing the
carrying amount of the asset to the future undiscounted net cash flow to be
generated by the asset. The evaluations involve amounts that are based on
management's best estimate and judgment. Actual results may differ from these
estimates. If recorded values are less than the fair values, no impairment is
indicated. SFAS No. 142 also requires that intangible assets with estimated
useful lives be amortized over their respective estimated useful lives.

Recently Issued Accounting Standards

      In July 2002, FASB issued SFAS 146, Accounting for Costs Associated with
Exit or Disposal Activities. This Standard supercedes the accounting guidance
provided by Emerging Issues Task Force Issue No. 94-3, Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring). FAS No. 146 requires
companies to recognize costs associated with exit activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
FAS No. 146 is to be applied prospectively to exit or disposal activities
initiated after December 31, 2002. This adoption did not have any impact on our
financial position or results of operations.

      In May 2003, the FASB issued SFAS 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity. SFAS 150
establishes standards for how an issuer classifies and measures in its statement
of financial position certain financial instruments with characteristics of both
liabilities and equity. SFAS 150 requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances) because that financial instrument embodies an obligation of the
issuer. Many of those instruments were previously classified as equity. SFAS 150
requires an issuer to classify the following instruments as liabilities (or
assets in some circumstances): mandatory redeemable financial instruments;
obligations to repurchase the issuer's equity shares by transferring assets; and
certain obligations to issue a variable number of its equity shares. SFAS 150 is
effective for all financial instruments entered into or modified after May 31,
2003, and otherwise shall be effective at the beginning of the first interim
period beginning after June 15, 2003. We do not expect SFAS 150 to have a
material effect on its consolidated financial statements.

      In November 2002, the FASB issued Interpretation 45 (FIN 45), Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others. For a guarantee subject to FIN 45, a
guarantor is required to:


                                       41
<PAGE>

   o  measure and recognize the fair value of the guarantee at inception (for
      many guarantees, fair value will be determined using a present value
      method); and

   o  provide new disclosures regarding the nature of any guarantees, the
      maximum potential amount of future guarantee payments, the current
      carrying amount of the guarantee liability, and the nature of any recourse
      provisions or assets held as collateral that could be liquidated and allow
      the guarantor to recover all or a portion of its payments in the event
      guarantee payments are required.

      The recognition and initial measurement provision was applicable to
guarantees issued or modified after December 31, 2002. FIN 45 does not have an
impact on our financial position.

      In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
Consolidation of Variable Interest Entities, an Interpretation of APB No. 51.
FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is
effective for all new variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or acquired prior to
February 1, 2003, the provisions of FIN 46 must be applied for the first interim
or annual period beginning after June 15, 2003. At June 30, 2003 we were not a
party to transactions contemplated under FIN 46.

      In November 2002, the Emerging Issues Task Force reached a consensus
opinion on EITF 00-21, Revenue Arrangements with Multiple Deliverables. The
consensus provides that revenue arrangements with multiple deliverables should
be divided into separate units of accounting if certain criteria are met. The
consideration for the arrangement should be allocated to the separate units of
accounting based on their relative fair values, with different provisions if the
fair value of all deliverables is not known or if the fair value is contingent
on delivery of specified items or performance conditions. Applicable revenue
recognition criteria should be considered separately for each separate unit of
accounting. EITF 00-21 is effective for revenue arrangements entered into in
fiscal periods beginning after June 15, 2003. Entities may elect to report the
change as a cumulative effect adjustment in accordance with APB Opinion 20,
Accounting Changes.

Risk Factors

      Our business is heavily dependent on the continued sale of PEG-INTRON and
ABELCET. If revenues from either of these products fail to increase as
anticipated or materially decline, our financial condition and results of
operations will be materially harmed.

      Our results of operations are heavily dependent on the revenues derived
from the sale and marketing of PEG-INTRON and ABELCET. Under our agreement with
Schering-Plough, pursuant to which we applied our PEG technology to develop a
modified form of Schering-Plough's INTRON A, we are receiving royalties on
worldwide sales of PEG-INTRON. During the fiscal year ended June 30, 2003, total
royalties comprised approximately 53% of our total revenues. Hoffmann-La Roche
recently received FDA and European Union approval for PEGASYS, which competes
with PEG-INTRON in the United States, Europe and Canada. The launch of PEGASYS
has led to greater competitive pressure on PEG-INTRON sales. Since its launch,
PEGASYS has taken market share away from PEG-INTRON and the overall market for
pegylated alpha-interferon in the treatment of Hepatitis C has not increased
sufficiently so as to offset the effect the increasing PEGASYS sales have had on
sales of PEG-INTRON. As a result, quarterly sales of PEG-INTRON and the
royalties we receive on those sales have flattened or declined in recent
quarters. We cannot assure you that PEGASYS will not continue to gain market
share at the expense of PEG-INTRON which could result in lower PEG-


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<PAGE>

INTRON sales and royalties to us. Schering- Plough is responsible for conducting
and funding the clinical studies, obtaining regulatory approval and marketing
the product worldwide on an exclusive basis. Schering-Plough received marketing
authorization for PEG-INTRON and in PEG-INTRON and REBETOL capsules as
combination therapy for the treatment of hepatitis C in U.S. and the European
Union. If Schering-Plough fails to effectively market PEG-INTRON or discontinues
the marketing of PEG-INTRON for these indications, this would have a material
adverse effect on our business, financial condition and results of operations.

      Even though the use of PEG-INTRON as a stand alone therapy and as
combination therapy with REBETOL has received FDA approval, we cannot assure you
that Schering-Plough will be successful in marketing PEG-INTRON or that
Schering-Plough will not continue to market INTRON A, either as a stand-alone
product or in combination therapy with REBETOL. The amount and timing of
resources dedicated by Schering-Plough to the marketing of PEG-INTRON is not
within our control. If Schering-Plough breaches or terminates its agreement with
us, the commercialization of PEG-INTRON could be slowed or blocked completely.
Our revenues will be negatively affected if Schering-Plough continues to market
INTRON A in competition with PEG-INTRON or if it cannot meet the manufacturing
demands of the market. In 2001, Schering-Plough was unable to manufacture
sufficient quantities of PEG-INTRON to meet market demand due to overwhelming
demand for the PEG-INTRON and ribavirin combination therapy. As a result,
Schering-Plough implemented a temporary wait list program for newly enrolled
patients in order to ensure uninterrupted access for those patients already
using PEG-INTRON. As of October 2, 2002, the wait list was terminated as a
sufficient quantity of PEG-INTRON and ribavirin was available to meet market
demand. If Schering-Plough breaches the agreement, a dispute may arise between
us. A dispute would be both expensive and time-consuming and may result in
delays in the commercialization of PEG-INTRON, which would likely have a
material adverse effect on our business, financial condition and results of
operations.

      ABELCET accounts for $37.1 million or approximately 25% of our total
revenues and we expect that ABELCET will account for a significant portion of
our future total revenues. The entry of new products from Merck and Pfizer in
the antifungal market is currently impacting ABELCET sales, as clinicians
explore the use of these new therapeutic agents. In addition, Fujisawa
Healthcare, Inc. and Gilead Pharmaceuticals are currently marketing AMBISOME,
and InterMune, Inc. is marketing AMPHOTEC, each of which is a liposomal version
of Amphotericin, for the treatment of fungal infections.AMBISOME and AMPHOTEC
compete with ABELCET and sales of these competitive products have resulted in
greater competitive pressure on ABELCET sales. We cannot assure you that
revenues from the sale and marketing of ABELCET will remain at or above current
levels. In addition, our manufacturing facility in Indianapolis manufactures our
entire supply of ABELCET. If sales of ABELCET decline, if the Indianapolis
facility were to cease operations or if there were a long-term supply
interruption due to the facility's decreased production, our financial condition
and results of operations will be materially harmed.

      We may not sustain profitability.

      Prior to the fiscal year ended June 30, 2001, we had incurred substantial
losses. As of June 30, 2003, we had an accumulated deficit of approximately
$27.1 million. Although we earned a profit for the fiscal years ended June 30,
2003, 2002 and 2001, we cannot assure you that we will be able to remain
profitable. Our ability to remain profitable will depend primarily on
Schering-Plough's effective marketing of PEG-INTRON and our effective marketing
of ABELCET, as well as on the rate of growth in our other product sales or
royalty revenue and on the level of our expenses. Our ability to achieve
long-term profitability will depend upon our or our licensees' ability to obtain
regulatory approvals for additional product candidates. Even if our product
candidates receive regulatory approval, we cannot assure you that our products
will achieve market acceptance or will be commercialized successfully or that
our operations will sustain profitability.


                                       43
<PAGE>

      We are subject to extensive regulation. Compliance with these regulations
can be costly, time consuming and subject us to unanticipated delays in
developing our products.

      The manufacturing and marketing of pharmaceutical products in the United
States and abroad are subject to stringent governmental regulation. The sale of
any of our products for use in humans in the United States will require the
prior approval of the FDA. Similar approvals by comparable agencies are required
in most foreign countries. The FDA has established mandatory procedures and
safety standards that apply to the clinical testing, manufacture and marketing
of pharmaceutical products. Obtaining FDA approval for a new therapeutic product
may take several years and involve substantial expenditures. ADAGEN was approved
by the FDA in 1990. ONCASPAR was approved in the United States and in Germany in
1994, and in Canada in 1997, in each case for patients with acute lymphoblastic
leukemia who are hypersensitive to native forms of L-asparaginase. ONCASPAR was
approved in Russia in April 1993 for therapeutic use in a broad range of
cancers. PEG-INTRON was approved in Europe and the United States for the
treatment of hepatitis C in May 2000 and January 2001, respectively. ABELCET
received U.S. approval in November 1995 and Canadian approval in September 1997.
DEPOCYT received U.S. approval in April 1999. Except for these approvals, none
of our other products has been approved for sale and use in humans in the United
States or elsewhere.

      We cannot assure you that we or our licensees will be able to obtain FDA
or other relevant marketing approval for any of our other products. In addition,
any approved products are subject to continuing regulation. If we or our
licensees fail to comply with applicable requirements it could result in:

      o     criminal penalties,

      o     civil penalties,

      o     fines,

      o     recall or seizure,

      o     injunctions requiring suspension of production,

      o     orders requiring ongoing supervision by the FDA, or

      o     refusal by the government to approve marketing or export
            applications or to allow us to enter into supply contracts.

      If we or our licensees fail to obtain or maintain requisite governmental
approvals or fail to obtain or maintain approvals of the scope requested, it
will delay or preclude us or our licensees or marketing partners from marketing
our products. It could also limit the commercial use of our products. Any such
failure or limitation may have a material adverse effect on our business,
financial condition and results of operations.

      We have experienced problems complying with the FDA's regulations for
manufacturing our products, and have had to conduct voluntary recalls of certain
of our products. These problems could materially harm our business.

      Manufacturers of drugs also must comply with the applicable FDA good
manufacturing practice regulations, which include quality control and quality
assurance requirements as well as the corresponding maintenance of records and
documentation. Manufacturing facilities are subject to ongoing periodic
inspection by the FDA and corresponding state agencies, including unannounced
inspections, and must be licensed as part of the product approval process before
they can be used in commercial manufacturing. We or our present or future
suppliers may be unable to comply with the applicable good manufacturing
practice regulations and other FDA regulatory requirements. We manufacture
ABELCET, ONCASPAR and ADAGEN. Schering-Plough is responsible for manufacturing
PEG-INTRON and SkyePharma is responsible for manufacturing DEPOCYT.


                                       44
<PAGE>

      ADAGEN and ONCASPAR use our earlier PEG technology which tends to be less
stable than the PEG technology used in PEG-INTRON and our products under
development. Due, in part, to the drawbacks in the earlier technologies we have
had and will likely continue to have potential manufacturing problems with these
products.

      Manufacturing and stability problems required us to implement voluntarily
recalls for one ADAGEN batch in March 2001 and certain batches of ONCASPAR in
June 2002. Voluntary recalls may take place in the future. Mandatory recalls can
also take place if regulators or courts require them, even if we believe our
products are safe and effective. Recalls result in lost sales of the recalled
products themselves, and can result in further lost sales while replacement
products are manufactured. We cannot assure you that a product recall will not
materially adversely affect our financial conditions and results of operations
or our reputation and relationship with our customers.

      During 1998, we experienced manufacturing problems with ONCASPAR. The
problems were due to increased levels of white particulates in batches of
ONCASPAR, which resulted in an increased rejection rate for this product. In
November 1999, as a result of manufacturing changes we implemented, the FDA
withdrew this distribution restriction. During this period we agreed with the
FDA to temporary labeling and distribution restrictions for ONCASPAR and
instituted additional inspection and labeling procedures prior to distribution.

      In July 1999, the FDA conducted an inspection of our manufacturing
facility in connection with our product license for ADAGEN. Following that
inspection, the FDA documented several deviations from Current Good
Manufacturing Practices, known as cGMP, in a Form 483 report. We provided the
FDA with a corrective action plan. In November 1999, the FDA issued a warning
letter citing the same cGMP deviations listed in the July 1999 Form 483, but it
also stated that the FDA was satisfied with our proposed corrective actions. As
a result of the deviations, the FDA decided not to approve product export
requests from us for ONCASPAR until it determined that all noted cGMP deviations
were either corrected or in the process of being corrected. This restriction was
removed in August 2000.

      Since January 2000, the FDA has conducted follow-up inspections as well as
routine inspections of our manufacturing facilities related to ABELCET, ONCASPAR
and ADAGEN. Following certain of these inspections, the FDA issued eight Form
483 reports citing deviations from cGMP, the most recent one of which was issued
in June 2003. We have or are in the process of responding to such reports with
corrective action plans.

      We are aware that the FDA has conducted inspections of certain of the
manufacturing facilities of Schering-Plough, and those inspections have resulted
in the issuance of Form 483s citing deviations from cGMP.

      If we or our licensees, including Schering-Plough, face additional
manufacturing problems in the future or if we or our licensees are unable to
satisfactorily resolve current or future manufacturing problems, the FDA could
require us or our licensees to discontinue the distribution of our products or
to delay continuation of clinical trials. In addition, if we or our licensees,
including Schering-Plough, cannot market and distribute our products for an
extended period, sales of the products will suffer, which would adversely affect
our financial results.

      Our clinical trials could take longer to complete and cost more than we
expect.

      We will need to conduct significant additional clinical studies of all of
our product candidates, which have not yet been approved for sale. These studies
are costly, time consuming and unpredictable. Any unanticipated costs or delays
in our clinical studies could harm our business, financial condition and results
of operations.


                                       45
<PAGE>

      A Phase III clinical trial is being conducted for PEG-INTRON for one
cancer indication. Schering-Plough is also in early stage clinical trials for
PEG-INTRON in other cancer indications. Schering-Plough is currently conducting
late-stage strategic clinical trials for treatment of hepatitis C in Japan.
Clinical trials are also being conducted for PEG-INTRON as a long term
maintenance therapy (the COPILOT study) and separately as combination therapy
with REBETOL in patients with chronic hepatitis C who did not respond to or had
relapsed following previous interferon-based therapy. We are currently
conducting Phase II clinical trials for PEG-Camptothecin and plan to initiate
Phase III clinical trials for ATG-FRESENIUS S during fiscal 2004. The rate of
completion of clinical trials depends upon many factors, including the rate of
enrollment of patients. If we or the other sponsors of these clinical trials are
unable to accrue sufficient clinical patients in such trials during the
appropriate period, such trials may be delayed and will likely incur significant
additional costs. In addition, FDA or institutional review boards may require us
to delay, restrict, or discontinue our clinical trials on various grounds,
including a finding that the subjects or patients are being exposed to an
unacceptable health risk.

      The cost of human clinical trials varies dramatically based on a number of
factors, including:

      o     the order and timing of clinical indications pursued,

      o     the extent of development and financial support from corporate
            collaborators,

      o     the number of patients required for enrollment,

      o     the difficulty of obtaining clinical supplies of the product
            candidate, and

      o     the difficulty in obtaining sufficient patient populations and
            clinicians.

      All statutes and regulations governing the conduct of clinical trials are
subject to change in the future, which could affect the cost of our clinical
trials. Any unanticipated costs or delays in our clinical studies could harm our
business, financial condition and results of operations.

      In some cases, we rely on corporate collaborators or academic institutions
to conduct some or all aspects of clinical trials involving our product
candidates. We will have less control over the timing and other aspects of these
clinical trials than if we conducted them entirely on our own. We cannot assure
you that these trials will commence or be completed as we expect or that they
will be conducted successfully.

      If preclinical and clinical trials do not yield positive results, our
product candidates will fail.

      If preclinical and clinical testing of one or more of our product
candidates does not demonstrate the safety and efficacy of the desired
indications, those potential products will fail. Numerous unforeseen events may
arise during, or as a result of, the testing process, including the following:

      o     the results of preclinical studies may be inconclusive, or they may
            not be indicative of results that will be obtained in human clinical
            trials,

      o     potential products may not have the desired effect or may have
            undesirable side effects or other characteristics that preclude
            regulatory approval or limit their commercial use if approved,

      o     results attained in early human clinical trials may not be
            indicative of results that are obtained in later clinical trials,
            and

      o     after reviewing test results, we or our strategic partners may
            abandon projects which we might previously have believed to be
            promising.


                                       46
<PAGE>

      Clinical testing is very costly and can take many years. The failure to
adequately demonstrate the safety and efficacy of a therapeutic product under
development would delay or prevent regulatory approval, which could adversely
affect our business and financial performance.

      In June 2001, we reported that Schering-Plough completed its Phase III
clinical trial, which compared PEG-INTRON to INTRON A in patients with newly
diagnosed chronic myelogenous leukemia or CML. In the study, although PEG-INTRON
demonstrated clinical comparability and a comparable safety profile with INTRON
A, the efficacy results for PEG-INTRON did not meet the protocol-specified
statistical criteria for non-inferiority, the primary endpoint of the study.

Even if we obtain regulatory approval for our products, they may not be accepted
in the marketplace.

      The commercial success of our products will depend upon their acceptance
by the medical community and third-party payors as clinically useful,
cost-effective and safe. Even if our products obtain regulatory approval, we
cannot assure you that they will achieve market acceptance of any kind. The
degree of market acceptance will depend on many factors, including:

      o     the receipt, timing and scope of regulatory approvals,

      o     the timing of market entry in comparison with potentially
            competitive products,

      o     the availability of third-party reimbursement, and

      o     the establishment and demonstration in the medical community of the
            clinical safety, efficacy and cost-effectiveness of drug candidates,
            as well as their advantages over existing technologies and
            therapeutics.

      If any of our products do not achieve market acceptance, we will likely
lose our entire investment in that product.

      We depend on our collaborative partners. If we lose our collaborative
partners or they do not apply adequate resources to our collaborations, our
product development and financial performance may suffer.

      We rely heavily and will depend heavily in the future on collaborations
with corporate partners, primarily pharmaceutical companies, for one or more of
the research, development, manufacturing, marketing and other commercialization
activities relating to many of our product candidates. If we lose our
collaborative partners, or if they do not apply adequate resources to our
collaborations, our product development and financial performance may suffer.

      The amount and timing of resources dedicated by our collaborators to their
collaborations with us is not within our control. If any collaborator breaches
or terminates its agreements with us, or fails to conduct its collaborative
activities in a timely manner, the commercialization of our product candidates
could be slowed or blocked completely. We cannot assure you that our
collaborative partners will not change their strategic focus or pursue
alternative technologies or develop alternative products as a means for
developing treatments for the diseases targeted by these collaborative programs.
Our collaborators could develop competing products. In addition, our revenues
will be affected by the effectiveness of our corporate partners in marketing any
successfully developed products.

      We cannot assure you that our collaborations will be successful. Disputes
may arise between us and our collaborators as to a variety of matters, including
financing obligations under our agreements and ownership of intellectual
property rights. These disputes may be both expensive and time-consuming and may
result in delays in the development and commercialization of products.


                                       47
<PAGE>

      We purchase some of the compounds utilized in our products from a single
source or a limited group of suppliers, and the partial or complete loss of one
of these suppliers could cause production delays and a substantial loss of
revenues.

      We purchase the unmodified compounds utilized in our approved products and
products under development from outside suppliers. We may be required to enter
into supply contracts with outside suppliers for certain unmodified compounds.
For example, we have an agreement with Hoffmann-La Roche Diagnostics GmbH to
produce the unmodified adenosine deaminase enzyme used in the manufacture of
ADAGEN and agreements with Merck & Co., Inc. and Kyowa Hakko to produce the
unmodified forms of L-asparaginase used in the manufacture of ONCASPAR. We have
two suppliers that produce the amphotericin used in the manufacture of ABELCET,
Bristol-Myers Squibb and Alpharma A.p.S. We have a supply agreement with
Bristol-Myers Squibb. If we experience a delay in obtaining or are unable to
obtain any unmodified compound, including unmodified adenosine deaminase,
unmodified L-asparaginase or amphotericin, on reasonable terms, or at all, it
could have a material adverse effect on our business, financial condition and
results of operations.

      If we are required to obtain an alternate source for an unmodified
compound utilized in a product, the FDA and relevant foreign regulatory agencies
will likely require that we perform additional testing to demonstrate that the
alternate material is biologically and chemically equivalent to the unmodified
compound previously used in our clinical trials. This testing could delay or
stop development of a product, limit commercial sales of an approved product and
cause us to incur significant additional expenses. If we are unable to
demonstrate that the alternate material is chemically and biologically
equivalent to the previously used unmodified compound, we will likely be
required to repeat some or all of the preclinical and clinical trials conducted
for the compound. The marketing of an FDA approved drug could be disrupted while
such tests are conducted. Even if the alternate material is shown to be
chemically and biologically equivalent to the previously used compound, the FDA
or relevant foreign regulatory agency may require that we conduct additional
clinical trials with the alternate material.

      Hoffmann-La Roche Diagnostic GmbH is the only FDA-approved supplier of the
adenosine deaminase enzyme, or ADA, used in ADAGEN. During 2002 we obtained FDA
approval of the use of the ADA enzyme obtained from bovine intestines from
cattle of New Zealand origin. New Zealand currently certifies that it's cattle
are bovine spongiform encephalopathy (BSE or mad cow disease) free. Beginning in
September 2002, the United States Department of Agriculture ("USDA") required
all animal-sourced materials shipped to the United States from any European
country to contain a veterinary certificate that the product is BSE free,
regardless of the country of origin. Our permit issued by the USDA to import ADA
expired in March 2003. We currently have more than six months supply of ADA
enzyme in inventory and have applied for a new import permit from the USDA. We
cannot guarantee that such import permit will be issued. If the USDA fails to
issue a new import permit or if our sole supplier is unable or unwilling to
continue supplying us with ADA, it is likely that we will be unable to produce
or distribute ADAGEN once we utilize our current inventory of ADA enzyme.

      The United States and foreign patents upon which our original PEG
technology was based have expired. We depend on patents and proprietary rights,
which may offer only limited protection against potential infringement and the
development by our competitors of competitive products.

      Research Corporation Technologies, Inc. held the patent upon which our
original PEG technology was based and had granted us a license under such
patent. Research Corporation's patent contained broad claims covering the
attachment of PEG to polypeptides. However, this United States patent and its
corresponding foreign patents expired in December 1996. Based upon the
expiration of


                                       48
<PAGE>

the Research Corporation patent, other parties will be permitted to make, use or
sell products covered by the claims of the Research Corporation patent, subject
to other patents, including those which we hold. We have obtained numerous
patents with claims covering improved methods of attaching or linking PEG to
therapeutic compounds. We cannot assure you that any of these patents will
enable us to prevent infringement or that competitors will not develop
alternative methods of attaching PEG to compounds potentially resulting in
competitive products outside the protection that may be afforded by our patents.
We are aware that others have also filed patent applications and have been
granted patents in the United States and other countries with respect to the
application of PEG to proteins and other compounds. However, other than
Hoffmann-La Roche's PEGASYS, we are unaware of any other PEGylated products that
compete with our PEGylated products. The expiration of the Research Corporation
patent or other patents related to PEG that have been granted to third parties
may have a material adverse effect on our business, financial condition and
results of operations.

      The pharmaceutical industry places considerable importance on obtaining
patent and trade secret protection for new technologies, products and processes.
Our success depends, in part, on our ability to develop and maintain a strong
patent position for our products and technologies both in the United States and
in other countries. We have been issued 118 patents in the United States, many
of which have foreign counterparts. These patents, if extensions are not
granted, are expected to expire beginning in 2004 through 2022. We have also
filed and currently have pending 48 patent applications in the United States.
Under our license agreements, we have access to large portions of Micromet's and
Nektar's patent estates as well as a small number of individually licensed
patents. Of the patents owned or licensed by us, 7 relate to PEG-INTRON, 28
relate to ABELCET, 11 relate to PEG-Camptothecin, and 3 relate to DEPOCYT.
Although we believe that our patents provide certain protection from
competition, we cannot assure you that such patents will be of substantial
protection or commercial benefit to us, will afford us adequate protection from
competing products, or will not be challenged or declared invalid. In addition,
we cannot assure you that additional United States patents or foreign patent
equivalents will be issued to us. The scope of patent claims for
biotechnological inventions is uncertain, and our patents and patent
applications are subject to this uncertainty.

      To facilitate development of our proprietary technology base, we may need
to obtain licenses to patents or other proprietary rights from other parties. If
we are unable to obtain such licenses, our product development efforts may be
delayed or blocked.

      We are aware that certain organizations are engaging in activities that
infringe certain of our PEG and SCA technology patents. We cannot assure you
that we will be able to enforce our patent and other rights against such
organizations.

      We expect that there will continue to be significant litigation in the
biotechnology and pharmaceutical industries regarding patents and other
proprietary rights. We have become involved in patent litigation, and we may
likely become involved in additional patent litigation in the future. We may
incur substantial costs in asserting any patent rights and in defending suits
against us related to intellectual property rights. Such disputes could
substantially delay our product development or commercialization activities and
could have a material adverse effect on our business, financial condition and
results of operations.

      We also rely on trade secrets, know-how and continuing technological
advancements to protect our proprietary technology. We have entered into
confidentiality agreements with our employees, consultants, advisors and
collaborators. However, these parties may not honor these agreements, and we may
not be able to successfully protect our rights to unpatented trade secrets and
know-how. Others may independently develop substantially equivalent proprietary
information and techniques or otherwise gain access to our trade secrets and
know-how.


                                       49
<PAGE>

      Our products may infringe the intellectual property rights of others,
which could increase our costs and negatively affect our profitability.

      Our success also depends on avoiding infringement of the proprietary
technologies of others. In particular, there may be certain issues patents and
patent applications claiming subject matter which we or our collaborators may be
required to license in order to research, develop or commercialize at least some
of our products. In addition, third parties may assert infringement or other
intellectual property claims against us. An adverse outcome in these proceedings
could subject us to significant liabilities to third parties, require disputed
rights to be licensed from third parties or require us to cease or modify the
use of our technology. If we are required to license such technology, we cannot
assure you that a license under such patents and patent applications will be
available on acceptable terms or at all. Further, we may incur substantial costs
defending ourselves in lawsuits against charges of patent infringement or other
unlawful use of another's proprietary technology.

      We have limited sales and marketing experience, which makes us dependent
on our marketing partners.

      We have historically had limited experience in sales, marketing or
distribution. In connection with our acquisition of ABELCET business from Elan
in November 2002, we acquired a 60-person sales and marketing team. In addition,
we have recently acquired marketing rights to DEPOCYT from SkyePharma and
reacquired the rights to market and distribute ONCASPAR in the United States and
certain other countries in June 2002. Prior to these acquisitions, ADAGEN, which
we market on a worldwide basis to a small patient population, was the only
product for which we engaged in the direct commercial marketing, and therefore,
we are significantly dependent on the ABELCET sales and marketing team to
promote ABELCET. We have provided exclusive marketing rights to Schering-Plough
for PEG-INTRON worldwide and to MEDAC GmbH for ONCASPAR in most of Europe and
parts of Asia. We have an agreement with Nova Factor, Inc. (formerly known as
Gentiva Health Services, Inc.) to purchase and distribute ADAGEN, ONCASPAR and
DEPOCYT in the United States and Canada. To the extent that we enter into
licensing arrangements for the marketing and sale of our future products, we may
not be able to enter into or maintain such arrangements on acceptable terms, if
at all, and any revenues we receive will depend primarily on the efforts of
these third parties. We will not control the amount and timing of marketing
resources that such third parties devote to our products. In addition, to the
extent that we market products directly, significant additional expenditures and
management resources would be required to increase the size of our internal
sales force. In any sales or marketing effort, we would compete with many other
companies that currently have extensive and well-funded sales operations. Our
marketing and sales efforts may be unable to compete successfully against other
such companies.

      We may acquire other companies or products and may be unable to
successfully integrate such companies with our operations.

      We may expand and diversify our operations with acquisitions. If we are
unsuccessful in integrating any such company with our operations, or if
integration is more difficult than anticipated, we may experience disruptions
that could have a material adverse effect on our business, financial condition
and results of operations. Some of the risks that may affect our ability to
integrate or realize any anticipated benefits from any acquisition include those
associated with:

      o     unexpected losses of key employees or customers of the acquired
            company;

      o     conforming the acquired company's standards, processes, procedures
            and controls with our operations;

      o     coordinating our new product and process development;

      o     diversion of existing management relating to the integration and
            operation of the acquired company;


                                       50
<PAGE>

      o     hiring additional management and other critical personnel; and

      o     increasing the scope, geographic diversity and complexity of our
            operations.

      We may need to obtain additional financing to meet our future capital
needs, and this financing may not be available when we need it.

      Our current development projects require substantial capital. We may
require substantial additional funds to conduct research activities, preclinical
studies, clinical trials and other activities relating to the successful
commercialization of potential products. In addition, we may seek to acquire
additional products, technologies and companies, which could require substantial
capital. In addition, we cannot be sure that we will be able to continue to
obtain significant revenue from PEG-INTRON. Additional funds from other sources
may not be available on acceptable terms, if at all. If adequate funds are
unavailable from operations or additional sources of financing, we may have to
delay, reduce the scope of or eliminate one or more of our research or
development programs or one or more of our proposed acquisitions of technologies
or companies which could materially and adversely affect our business, financial
condition and operations.

      While we believe that our cash, cash equivalents and investments will be
adequate to satisfy our capital needs for the foreseeable future, our actual
capital requirements will depend on many factors, including:

      o     the level of revenues we receive from our FDA-approved products and
            product candidates,

      o     continued progress of our research and development programs,

      o     our ability to establish additional collaborative arrangements,

      o     changes in our existing collaborative relationships,

      o     progress with preclinical studies and clinical trials,

      o     the time and costs involved in obtaining regulatory clearance for
            our products,

      o     the costs involved in preparing, filing, prosecuting, maintaining
            and enforcing patent claims,

      o     competing technological and market developments, and

      o     our ability to market and distribute our products and establish new
            collaborative and licensing arrangements.

      We may seek to raise any necessary additional funds through equity or debt
financings, collaborative arrangements with corporate partners or other sources
which may be dilutive to existing stockholders. We cannot assure you that we
will be able to obtain additional funds on acceptable terms, if at all. If
adequate funds are not available, we may be required to:

      o     delay, reduce the scope or eliminate one or more of our development
            projects,

      o     obtain funds through arrangements with collaborative partners or
            others that may require us to relinquish rights to technologies,
            product candidates or products that we would otherwise seek to
            develop or commercialize ourselves, or

      o     license rights to technologies, product candidates or products on
            terms that are less favorable to us than might otherwise be
            available.

      We depend on key personnel and may not be able to retain these employees
or recruit additional qualified personnel, which would harm our business.

      Because of the specialized scientific nature of our business, we are
highly dependent upon qualified scientific, technical and managerial personnel,
which include Arthur J. Higgins, Kenneth J.


                                       51
<PAGE>

Zuerblis and Ulrich Grau, Ph.D. There is intense competition for qualified
personnel in the pharmaceutical field. Therefore, we may not be able to attract
and retain the qualified personnel necessary for the development of our
business. Although we have employment agreements with Mr. Higgins, Mr. Zuerblis
and Dr. Grau, the loss of their services as well as the failure to recruit
additional key scientific, technical and managerial personnel in a timely
manner, would harm our research and development programs and our business.

Risks Related To Our Industry

      We face rapid technological change and intense competition, which could
harm our business and results of operations.

      The biopharmaceutical industry is characterized by rapid technological
change. Our future success will depend on our ability to maintain a competitive
position with respect to technological advances. Rapid technological development
by others may result in our products and technologies becoming obsolete.

      Many of our competitors have substantially greater research and
development capabilities and experiences and greater manufacturing, marketing
and financial resources than we do. Accordingly, our competitors may develop
technologies and products that are superior to those we or our collaborators are
developing and render our technologies and products or those of our
collaborators obsolete and noncompetitive. In addition, many of our competitors
have much more experience than we do in preclinical testing and human clinical
trials of new drugs, as well as obtaining FDA and other regulatory approval. If
we cannot compete effectively, our business and financial performance would
suffer.

      We face intense competition from established biotechnology and
pharmaceutical companies, as well as academic and research institutions that are
pursuing competing technologies and products. We know that competitors are
developing or manufacturing various products that are used for the prevention,
diagnosis or treatment of diseases that we have targeted for product
development. For example, Hoffmann-La-Roche's PEGASYS has received FDA and
European Union approval for treatment of Hepatitis C as a monotherapy and in
combination with Ribavirin. PEGASYS competes with PEG-INTRON in the United
States and the European Union and has led to greater competitive pressure on
PEG-INTRON sales. Since its launch, PEGASYS has taken market share away from
PEG-INTRON and the overall market for pegylated alpha-interferon in the
treatment of Hepatitis C has not increased sufficiently so as offset the effect
the increasing PEGASYS sales have had on sales of PEG-INTRON. As a result,
quarterly sales of PEG-INTRON and the royalties we receive on those sales have
flattened or declined in recent quarters. We cannot assure you that PEGASYS will
not continue to gain market share at the expense of PEG-INTRON which could
result in lower PEG-INTRON sales and royalties to us. Similarly, Fujisawa
Healthcare, Inc. and Gilead Pharmaceuticals are currently marketing AmBisome,
and InterMune, Inc. is marketing Amphotec, each of which is a liposomal version
of amphotericin, for the treatment of fungal infections. AmBisome and Amphotec
compete with ABELCET and sales of these competitive products have resulted in
greater competitive pressure on ABELCET sales. DEPOCYT, an injectable, sustained
release formulation of the chemotherapeutic agent cytarabine for the treatment
of lymphomatous meningitis, competes with the generic drugs, Cytarabine and
Methotrexate, and ONCASPAR, a PEG-enhanced version of a naturally occurring
enzyme called L-asparaginase, competes with Asparaginase to treat patients with
acute lymphoblastic leukemia.

      Existing and future products, therapies and technological approaches will
compete directly with our products. Current and prospective competing products
may provide greater therapeutic benefits for a specific problem or may offer
comparable performance at a lower cost. Any product candidate that we develop
and that obtains regulatory approval must then compete for market


                                       52
<PAGE>

acceptance and market share. Our product candidates may not gain market
acceptance among physicians, patients, healthcare payors and the medical
community.

      We may be sued for product liability.

      Because our products and product candidates are new treatments with
limited, if any, past use on humans, their use during testing or after approval
could expose us to product liability claims. We maintain product liability
insurance coverage in the total amount of $65 million for claims arising from
the use of our products in clinical trials prior to FDA approval and for claims
arising from the use of our products after FDA approval. We cannot assure you
that we will be able to maintain our existing insurance coverage or obtain
coverage for the use of our other products in the future. Also, this insurance
coverage and our resources may not be sufficient to satisfy any liability
resulting from product liability claims, and a product liability claim may have
a material adverse effect on our business, financial condition or results of
operations.

      Because of the uncertainty of pharmaceutical pricing, reimbursement and
healthcare reform measures, we may be unable to sell our products profitably in
the United States.

      The availability of reimbursement by governmental and other third-party
payors affects the market for any pharmaceutical product. In recent years, there
have been numerous proposals to change the healthcare system in the United
States and further proposals are likely. Some of these proposals have included
measures that would limit or eliminate payments for medical procedures and
treatments or subject the pricing of pharmaceuticals to government control. In
addition, government and private third-party payors are increasingly attempting
to contain healthcare costs by limiting both the coverage and the level of
reimbursement of drug products. Consequently, significant uncertainty exists as
to the reimbursement status of newly-approved health care products.

      Our ability to commercialize our products will depend, in part, on the
extent to which reimbursement for the cost of the products and related
treatments will be available from third-party payors. If we or any of our
collaborators succeeds in bringing one or more products to market, we cannot
assure you that third-party payors will establish and maintain price levels
sufficient for realization of an appropriate return on our investment in product
development. In addition, lifetime limits on benefits included in most private
health plans may force patients to self-pay for treatment. For example, patients
who receive ADAGEN are expected to require injections for their entire lives.
The cost of this treatment may exceed certain plan limits and cause patients to
self-fund further treatment. Furthermore, inadequate third-party coverage may
lead to reduced market acceptance of our products. Significant changes in the
healthcare system in the United States or elsewhere could have a material
adverse effect on our business and financial performance.

Risks Related To Our Subordinated Notes and Common Stock

      The price of our common stock has been, and may continue to be, volatile
which may significantly affect the trading price of our notes.

      Historically, the market price of our common stock has fluctuated over a
wide range, and it is likely that the price of our common stock will fluctuate
in the future. The market price of our common stock could be impacted due to a
variety of factors, including:

      o     the results of preclinical testing and clinical trials by us, our
            corporate partners or our competitors,

      o     announcements of technical innovations or new products by us, our
            corporate partners or our competitors,

      o     the status of corporate collaborations and supply arrangements,


                                       53
<PAGE>

      o     regulatory approvals,

      o     government regulation,

      o     developments in patent or other proprietary rights,

      o     public concern as to the safety and efficacy of products developed
            by us or others,

      o     litigation,

      o     acts of war or terrorism in the United States or worldwide, and

      o     general market conditions in our industry.

      In addition, due to one or more of the foregoing factors in one or more
future quarters, our results of operations may fall below the expectations of
securities analysts and investors. In that event, the market price of our common
stock could be materially and adversely affected.

      The stock market has recently experienced extreme price and volume
fluctuations. These fluctuations have especially affected the market price of
the stock of many high technology and healthcare-related companies. Such
fluctuations have often been unrelated to the operating performance of these
companies. Nonetheless, these broad market fluctuations may negatively affect
the market price of our common stock.

      Our notes are subordinated to all existing and future indebtedness.

      Our 4.5% convertible subordinated notes are unsecured and subordinated in
right of payment to all of our existing and future senior indebtedness. In the
event of our bankruptcy, liquidation or reorganization, or upon acceleration of
the notes due to an event of default under the indenture and in certain other
events, our assets will be available to pay obligations on the notes only after
all senior indebtedness has been paid. As a result, there may not be sufficient
assets remaining to pay amounts due on any or all of the outstanding notes. We
are not prohibited from incurring debt, including senior indebtedness, under the
indenture. If we were to incur additional debt or liabilities, our ability to
pay our obligations on the notes could be adversely affected. As of June 30,
2003, we had no senior indebtedness outstanding.

      We may be unable to redeem our notes upon a fundamental change.

      We may be unable to redeem our notes in the event of a fundamental change.
Upon a fundamental change, holders of the notes may require us to redeem all or
a portion of the notes. If a fundamental change were to occur, we may not have
enough funds to pay the redemption price for all tendered notes. Any future
credit agreements or other agreements relating to our indebtedness may contain
similar provisions, or expressly prohibit the repurchase of the notes upon a
fundamental change or may provide that a fundamental change constitutes an event
of default under that agreement. If a fundamental change occurs at a time when
we are prohibited from purchasing or redeeming notes, we could seek the consent
of our lenders to redeem the notes or could attempt to refinance this debt. If
we do not obtain a consent, we could not purchase or redeem the notes. Our
failure to redeem tendered notes would constitute an event of default under the
indenture. In such circumstances, or if a fundamental change would constitute an
event of default under our senior indebtedness, the subordination provisions of
the indenture would restrict payments to the holders of notes. A "fundamental
change" is any transaction or event (whether by means of an exchange offer,
liquidation, tender offer, consolidation, merger, combination, reclassification,
recapitalization or otherwise) in connection with which all or substantially all
of our common stock is exchanged for, converted into, acquired for or
constitutes solely the right to receive, consideration which is not all or
substantially all common stock that:

      o     is listed on, or immediately after the transaction or event will be
            listed on, a United States national securities exchange, or


                                       54
<PAGE>

      o     is approved, or immediately after the transaction or event will be
            approved, for quotation on The Nasdaq National Market or any similar
            United States system of automated dissemination of quotations of
            securities prices.

      The term fundamental change is limited to certain specified transactions
and may not include other events that might adversely affect our financial
condition or the market value of the notes or our common stock. Our obligation
to offer to redeem the notes upon a fundamental change would not necessarily
afford holders of the notes protection in the event of a highly leveraged
transaction, reorganization, merger or similar transaction involving us.

      A public market for our notes may fail to develop or be sustained.

      The initial purchasers of the notes, although they have advised us that
they intend to make a market in the notes, are not obligated to do so and may
discontinue this market making activity at any time without notice. In addition,
market making activity by the initial purchasers will be subject to the limits
imposed by the Securities Act and the Exchange Act of 1934, as amended. As a
result, we cannot assure you that any market for the notes will develop or, if
one does develop, that it will be maintained. If an active market for the notes
fails to develop or be sustained, the trading price of the notes could be
materially adversely affected.

      Events with respect to our share capital could cause the price of our
common stock to decline.

      Sales of substantial amounts of our common stock in the open market, or
the availability of such shares for sale, could adversely affect the price of
our common stock. An adverse effect on the price of our common stock may
adversely affect the trading price of the notes. We had 43.5 million shares of
common stock outstanding as of June 30, 2003. The following securities that may
be exercised for, or are convertible into, shares of our common stock were
issued and outstanding as of June 30, 2003:

      o     Options. Stock options to purchase 3.9 million shares of our common
            stock at a weighted average exercise price of approximately $35.02
            per share; of this total, 1.6 million were exercisable at a weighted
            average exercise price of $35.62 per share as of such date.

      o     Convertible subordinated notes. Notes which will convert to 5.6
            million shares of our common stock at a conversion price of $70.98
            as of such date.

      The shares of our common stock that may be issued under the options and
upon conversion of the Convertible Subordinated Notes are currently registered
with the SEC. The shares of common stock that may be issued upon conversion of
the Convertible Subordinated Notes are eligible for sale without any volume
limitations pursuant to Rule 144(k) under the Securities Act.

      The issuance of preferred stock may adversely affect rights of common
stockholders or discourage a takeover.

      Under our certificate of incorporation, our board of directors has the
authority to issue up to 3.0 million shares of preferred stock and to determine
the price, rights, preferences and privileges of those shares without any
further vote or action by our stockholders. The rights of the holders of common
stock will be subject to, and may be adversely affected by, the rights of the
holders of any shares of preferred stock that may be issued in the future.

      In May, 2002, our board of directors authorized shares of Series B
Preferred Stock in connection with its adoption of a stockholder rights plan,
under which we issued rights to purchase


                                       55
<PAGE>

Series B Preferred Stock to holders of the common stock. Upon certain triggering
events, such rights become exercisable to purchase common stock (or, in the
discretion of our board of directors, Series B Preferred Stock) at a price
substantially discounted from the then current market price of the Common Stock.
Our stockholder rights plan could generally discourage a merger or tender offer
involving our securities that is not approved by our board of directors by
increasing the cost of effecting any such transaction and, accordingly, could
have an adverse impact on stockholders who might want to vote in favor of such
merger or participate in such tender offer.

      While we have no present intention to authorize any additional series of
preferred stock, such issuance, while providing desirable flexibility in
connection with possible acquisitions and other corporate purposes, could also
have the effect of making it more difficult for a third party to acquire a
majority of our outstanding voting stock. The preferred stock may have other
rights, including economic rights senior to the Common Stock, and, as a result,
the issuance thereof could have a material adverse effect on the market value of
the common stock.

      We have a significant amount of indebtedness.

      As a result of the initial offering of the notes, our long-term debt is
$400.0 million. This indebtedness has affected us by:

      o     significantly increasing our interest expense and related debt
            service costs, and

      o     making it more difficult to obtain additional financing.

      We may not generate sufficient cash flow from operations to satisfy the
annual debt service payments that will be required under the notes. This may
require us to use a portion of the proceeds of the notes to pay interest or
borrow additional funds or sell additional equity to meet our debt service
obligations. If we are unable to satisfy our debt service requirements,
substantial liquidity problems could result, which would negatively impact our
future prospects.

      The market for unrated debt is subject to disruptions, which could have an
adverse effect on the market price of the notes.

      Our notes have not been rated. As a result, holders of the notes have the
risks associated with an investment in unrated debt. Historically, the market
for unrated debt has been subject to disruptions that have caused substantial
volatility in the prices of such securities and greatly reduced liquidity for
the holders of such securities. If the notes are traded, they may trade at a
discount from their initial offering price, depending on, among other things,
prevailing interest rates, the markets for similar securities, general economic
conditions and our financial condition, results of operations and prospects. The
liquidity of, and trading markets for, the notes also may be adversely affected
by general declines in the market for unrated debt. Such declines may adversely
affect the liquidity of, and trading markets for, the notes, independent of our
financial performance or prospects. In addition, certain regulatory restrictions
prohibit certain types of financial institutions from investing in unrated debt,
which may further suppress demand for such securities. We cannot assure you that
the market for the notes will not be subject to similar disruptions. Any such
disruptions may have an adverse effect on the holders of the notes.


                                       56
<PAGE>

                       RATIO OF EARNINGS TO FIXED CHARGES

      The ratio of earnings to fixed charges was negative for periods before
June 30, 2001 because we incurred net losses in the periods prior to that time.
The dollar amounts of the deficiencies for these periods and the ratio of
earnings to fixed charges for the years ended June 30, 2003, 2002 and 2001 are
disclosed below (dollars in thousands):

<TABLE>
<CAPTION>
                                                          Year Ended June 30,
                                         -------------------------------------------------------
                                           2003        2002        2001      2000         1999
                                           ----        ----        ----      ----         ----
<S>                                         <C>         <C>        <C>      <C>          <C>
Ratio of earnings to fixed charges*         3:1         3:1        21:1         N/A          N/A

Deficiency of earnings available to
    cover fixed charges* ..........         N/A         N/A         N/A     ($6,306)     ($4,919)
</TABLE>

      *Earnings consist of net income (loss) plus fixed charges less capitalized
interest and preferred stock dividends. Fixed charges consist of interest
expense, including amortization of debt issuance costs and that portion of
rental expense we believe to be representative of interest.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

      The following discussion about our exposure to market risk of financial
instruments contains forward-looking statements. Actual results may differ
materially from those described.

      Our holdings of financial instruments are comprised of debt securities and
time deposits. All such instruments are classified as securities
available-for-sale. We do not invest in portfolio equity securities or
commodities or use financial derivatives for trading purposes. Our debt security
portfolio represents funds held temporarily pending use in our business and
operations. We manage these funds accordingly. We seek reasonable assuredness of
the safety of principal and market liquidity by investing in rated fixed income
securities while at the same time seeking to achieve a favorable rate of return.
Our market risk exposure consists principally of exposure to changes in interest
rates. Our holdings are also exposed to the risks of changes in the credit
quality of issuers. We typically invest the majority of our investments in the
shorter-end of the maturity spectrum, and at June 30, 2003 all of our holdings
were in instruments maturing in four years or less.

      The table below presents the principal amounts and related weighted
average interest rates by year of maturity for our investment portfolio as of
June 30, 2003 (in thousands).

<TABLE>
<CAPTION>
                            2004         2005         2006        Total      Fair Value
                        ---------------------------------------------------------------
<S>                       <C>          <C>          <C>          <C>          <C>
Fixed Rate                $24,747      $27,716      $33,859      $86,322      $86,499
Average Interest Rate        3.31%        1.81%        2.12%        2.36%          --
Variable Rate                  --           --           --           --           --
Average Interest Rate          --           --           --           --           --
                          -----------------------------------------------------------
                          $24,747      $27,716      $33,859      $86,322      $86,499
                          ===========================================================
</TABLE>

      Our 4.5% convertible subordinated notes in the principal amount of $400.0
million due July 1, 2008 have fixed interest rates. The fair value of the notes
was approximately $327.0 million at June 30, 2003. The fair value of fixed
interest rate convertible notes is affected by changes in interest rates and by
changes in the price of our common stock.


                                       57
<PAGE>

Item 8. Financial Statements and Supplementary Data

      The response to this item is submitted as a separate section of this
report commencing on Page F-1.

Item 9. Changes in and Disagreements With Accountants on Accounting and
        Financial Disclosure

      Not applicable.

Item 9A. Controls and Procedures

      Evaluation of disclosure controls and procedures. Based on our
management's evaluation (with the participation of our principal executive
officer and principal financial officer), as of the end of the period covered by
this report, our principal executive officer and principal financial officer
have concluded that our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended,
(the "Exchange Act")) are effective to ensure that information required to be
disclosed by us in reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in Securities and Exchange Commission rules and forms.

      Changes in internal control over financial reporting. There was no change
in our internal control over financial reporting during our fourth fiscal
quarter that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.


                                       58
<PAGE>

                                    PART III

      The information required by Item 10 - Directors and Executive Officers of
the Registrant; Item 11 - Executive Compensation; Item 12 - Security Ownership
of Certain Beneficial Owners and Management, Item 13 - Certain Relationships and
Related Transactions and Item 14 - Principal Accounting Fees and Services is
incorporated into Part III of this Annual Report on Form 10-K by reference to
the Proxy Statement for our Annual Meeting of Stockholders scheduled to be held
on December 2, 2003.


                                       59
<PAGE>

                                     PART IV

Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

      (a)(1) and (2). The response to this portion of Item 15 is submitted as a
separate section of this report commencing on page F-1.

      (a)(3) and (c). Exhibits (numbered in accordance with Item 601 of
Regulation S-K).

<TABLE>
<CAPTION>
  Exhibit                                                                                         Reference
   Number                                        Description                                          No.
   ------                                        -----------                                          ---
<S>                 <C>                                                                           <C>
    2.1             Mutual Termination Agreement and Release by and among Enzon
                    Pharmaceuticals, Inc., NPS Pharmaceuticals, Inc., Momentum Merger
                    Corporation, Newton Acquisition Corporation and Einstein Acquisition
                    Corporation, dated as of June 4, 2003.                                           +-+-(3)

    3(i)            Certificate of Incorporation as amended                                          ~(3(i))

    3(i)(a)         Amendment to Certificate of Incorporation                                          \\(A)

    3(ii)           By laws, as amended                                                            ^^(3(ii))

    4.1             Indenture dated as of June 26, 2001, between the Company and
                    Wilmington Trust Company, as trustee, including the form of 4 1/2%
                    Convertible Subordinated Note due 2008 attached as Exhibit A thereto           ++++(4.1)

    4.2             Rights Agreement dated May 17, 2002 between the Company and
                    Continental Stock Transfer Trust Company, as rights agent                           ^(1)

    4.3             First Amendment to the Rights Agreement, dated as of February 19,
                    2003 between the Company and Continental Stock Transfer & Trust
                    Company, as rights agent.                                                          +-(1)

    10.1            Form of Change of Control Agreements dated as of January 20, 1995                #(10.2)
                    entered into with a Company's Executive Officer**

    10.2            Lease - 300-C Corporate Court, South Plainfield, New Jersey                      =(10.3)

    10.3            Lease dated April 1, 1995 regarding 20 Kingsbridge Road, Piscataway,
                    New Jersey                                                                       #(10.7)

    10.4            Lease 300A-B Corporate Court, South Plainfield, New Jersey                     ++(10.10)

    10.5            Employment Agreement dated May 9, 2001, between the Company and               ///(10.30)
                    Arthur J. Higgins**
    10.6            Amendment dated May 23, 2001, to Employment Agreement between the
                    Company and Arthur J. Higgins dated May 9, 2001**                             ///(10.31)

    10.7            Form of Restricted Stock Award Agreement between the Company and
                    Arthur J. Higgins**                                                            ////(4.3)

    10.8            Modification of Lease Dated May 14, 2003 - 300-C Corporate Court,
                    South Plainfield, New Jersey                                                           *

    10.9            Lease - 685 Route 202/206, Bridgewater, New Jersey                                   ^^^

    10.10           Employment Agreement with Ulrich Grau dated as of March 6, 2002**                    ^^^

    10.11           2001 Incentive Stock Plan**                                                     ~(10.14)

    10.12           Development, License and Supply Agreement between the Company
                    and Schering Corporation; dated November 14, 1990, as amended*                  ~(10.15)

    10.13           Transition Agreement dated July 2, 2002 between the Company and
                    Jeffrey McGuire**                                                              ~~(10.16)

    10.14           Asset Purchase Agreement between the Company and Elan
                    Pharmaceuticals, Inc., dated as of October 1, 2002                                \(2.1)

    10.15           License Agreement between the Company and Elan Pharmaceuticals,               ~~~(10.18)
</TABLE>


                                       60
<PAGE>

<TABLE>
<CAPTION>
  Exhibit                                                                                         Reference
   Number                                        Description                                          No.
   ------                                        -----------                                          ---
<S>                 <C>                                                                           <C>

                    Inc., dated November 22, 2002
    10.16           Option Agreement between the Company and Arthur J. Higgins, dated as          ~~~(10.19)
                    of December 3, 2002**

    10.17           Form of Restricted Stock Agreement between the Company and Arthur J.
                    Higgins **                                                                    ~~~(10.20)

    10.18           Royalty Agreement between the Company and Vivo Healthcare
                    Corporation, dated as of October 16, 2002**                                   ~~~(10.21)

    10.19           Assignment Agreement between the Company and Vivo Healthcare
                    Corporation, dated as of October 16, 2002**                                   ~~~(10.22)

    10.20           Restricted Stock Purchase Agreement dated as of June 4, 2003 by and
                    between Enzon Pharmaceuticals, Inc. and NPS Pharmaceuticals, Inc.                +-+-(4)

    10.21           Registration Rights Agreement dated as of June 4, 2003 by and between
                    Enzon Pharmaceuticals, Inc. and NPS Pharmaceuticals, Inc.                        +-+-(5)

    10.22           Independent Directors' Compensation Arrangement                                        *

    12.1            Computation of Ratio of Earnings to Fixed Charges                                      *

    21.0            Subsidiaries of Registrant                                                             *

    23.0            Consent of KPMG LLP                                                                    *

    31.1            Certification of Chief Executive Officer pursuant to Rule 13a-14(a)                    *
                    (Section 302 Certification), as adopted pursuant to Section 302 of
                    the Sarbanes-Oxley Act of 2002

    31.2            Certification of Chief Financial Officer pursuant to Rule 13a-14(a)
                    (Section 302 Certification), as adopted pursuant to Section 302 of
                    the Sarbanes-Oxley Act of 2002                                                         *

    32.1            Certification of Chief Executive Officer pursuant to 18 U.S.C.
                    Section 1350, as adopted pursuant to Section 906 of the
                    Sarbanes-Oxley Act of 2002                                                             *

    32.2            Certification of Chief Financial Officer pursuant to 18 U.S.C.
                    Section 1350, as adopted pursuant to Section 906 of the
                    Sarbanes-Oxley Act of 2002                                                             *
</TABLE>

      *     Filed herewith

      =     Previously filed as an exhibit to the Company's Registration
            Statement on Form S-18 (File No. 2-88240-NY) and incorporated herein
            by reference thereto.

      ++    Previously filed as an exhibit to the Company's Annual Report on
            Form 10-K for the fiscal year ended June 30, 1993 and incorporated
            herein by reference thereto.

      +++   Previously filed as an exhibit to the Company's Annual Report on
            Form 10-K for the fiscal year ended June 30, 2001 and incorporated
            herein by reference thereto.

      ++++  Previously filed as an exhibit to the Company's Registration
            Statement on Form S-3 (File No. 333-67509) filed with the Commission
            and incorporated herein by reference thereto.

      #     Previously filed as an exhibit to the Company's Quarterly Report on
            Form 10-Q for the quarter ended March 31, 1995 and incorporated
            herein by reference thereto.

      ///   Previously filed as an exhibit to the Company's Current Report on
            Form 8-K filed with the Commission on June 13, 2001 and incorporated
            herein by reference thereto.

      ////  Previously filed as an exhibit to the Company's Registration
            Statement on Form S-8 (File No. 333-64110) filed with the Commission
            and incorporated herein by reference thereto.


                                       61
<PAGE>

      ^     Previously filed as an exhibit to the Company's Form 8-A (File No.
            000-12957) filed with the Commission on May 22, 2002 and
            incorporated herein by reference thereto.

      ^^    Previously filed as an exhibit to the Company's Current Report on
            Form 8-K filed with the Commission on May 22, 2002 and incorporated
            herein by reference thereto.

      ^^^   Previously filed as an exhibit to the Company's Quarterly Report on
            Form 10-Q for the quarter ended March 31, 2002 and incorporated
            herein by reference thereto.

      ~     Previously filed as an exhibit to the Company's Annual Report on
            Form 10-K for the fiscal year ended June 30, 2002 and incorporated
            herein by reference thereto.

      ~~    Previously filed as an exhibit to the Company's Quarterly Report on
            Form 10-Q for the quarter ended September 30, 2002 and incorporated
            herein by reference thereto.

      ~~~   Previously filed as an exhibit to the Company's Quarterly Report on
            Form 10-Q for the quarter ended December 31, 2002 and incorporated
            herein by reference thereto.

      \     Previously filed as an exhibit to the Company's Current Report on
            Form 8-K filed on October 2, 2002 and incorporated herein by
            reference thereto.

      \\    Previously filed as an exhibit to the Company's Current Report on
            Form 8-K filed on December 10, 2002 and incorporated herein by
            reference thereto.

      +-    Previously filed as an exhibit to the Company's Form 8-A12G/A (File
            No. 000-12957) filed with the Commission on February 20, 2003 and
            incorporated herein by reference thereto.

      +-+-  Previously filed as an exhibit to the Company's Amendment No. 1 to
            Schedule 13D (File No. 005-46256) filed with the Commission on
            February 28, 2003 and incorporated herein by reference thereto.

      *     Copy omits information for which confidential treatment has been
            granted.

      **    Required to be filed pursuant to Item 601(b) (10) (ii) (A) or (iii)
            of Regulation S-K.


                                       62
<PAGE>

                                  EXHIBIT INDEX

  Exhibit
  Numbers                             Description
  -------                             -----------

    10.8       Modification of Lease Dated May 14, 2003 - 300-C Corporate Court,
               South Plainfield, New Jersey

    10.22      Independent Directors' Compensation Arrangement

    12.1       Computation of Ratio of Earnings to Fixed Charges

    21.0       Subsidiaries of Registrant

    23.0       Consent of KPMG LLP

    31.1       Certification of Chief Executive Officer pursuant to Rule
               13a-14(a) (Section 302 Certification), as adopted pursuant to
               Section 302 of the Sarbanes-Oxley Act of 2002

    31.2       Certification of Chief Financial Officer pursuant to Rule
               13a-14(a) (Section 302 Certification), as adopted pursuant to
               Section 302 of the Sarbanes-Oxley Act of 2002

    32.1       Certification of Chief Executive Officer pursuant to 18 U.S.C.
               Section 1350, as adopted pursuant to Section 906 of the
               Sarbanes-Oxley Act of 2002

    32.2       Certification of Chief Financial Officer pursuant to 18 U.S.C.
               Section 1350, as adopted pursuant to Section 906 of the
               Sarbanes-Oxley Act of 2002

(b) Reports on Form 8-K.

              On May 13, 2003, we filed with the Commission a Current Report on
    Form 8-K dated May 13, 2003 reporting our financial results for the third
    quarter of fiscal year 2003.

              On June 5, 2003, we filed with the Commission a Current Report on
    Form 8-K dated June 4, 2003 reporting the mutual termination of the merger
    agreement that was entered into on February 19, 2003 between NPS
    Pharmaceuticals, Inc. and Enzon Pharmaceuticals, Inc.

              On June 17, 2003, we filed with the Commission a Current Report on
    Form 8-K dated June 17, 2003 reporting our agreement with Fresenius in which
    Fresenius has licensed to Enzon exclusive North American rights to develop
    and commercialize ATG-FRESENIUS S, a polyclonal antibody preparation used
    for T-lymphocyte suppression in organ transplant patients.


                                       63
<PAGE>

                                   SIGNATURES

Pursuant to the requirements of section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

                                            ENZON PHARMACEUTICALS, INC.
                                                    (Registrant)

Dated: September 29, 2003                     by: /S/ Arthur J. Higgins
                                                 -------------------------------
                                                 Arthur J. Higgins
                                                 Chairman, President and Chief
                                                 Executive Officer
                                                 (Principal Executive Officer)

      Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:

<TABLE>
<CAPTION>
         Name                                         Title                           Date
         ----                                         -----                           ----
<S>                                         <C>                                 <C>
/S/ Arthur  J. Higgins                      Chairman, President and             September 29, 2003
---------------------------------           Chief Executive Officer
Arthur J. Higgins                           (Principal Executive Officer)


/S/ Kenneth J. Zuerblis                     Vice President Finance,             September 29, 2003
---------------------------------           Chief Financial Officer
Kenneth J. Zuerblis                         (Principal Financial and
                                            Accounting Officer) and
                                            Corporate Secretary


/S/ David S. Barlow                         Director                            September 29, 2003
---------------------------------
David S. Barlow


/S/ Rolf A. Classon                         Director                            September 29, 2003
---------------------------------
Rolf A. Classon


/S/ Rosina B. Dixon                         Director                            September 29, 2003
---------------------------------
Rosina B. Dixon


/S/ David W. Golde                          Director                            September 29, 2003
---------------------------------
David W. Golde


/S/ Robert LeBuhn                           Director                            September 29, 2003
---------------------------------
Robert LeBuhn


/S/ Robert  L. Parkinson, Jr.               Director                            September 29, 2003
---------------------------------
Robert L . Parkinson, Jr.
</TABLE>


                                       64
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES

                                      Index

                                                                            Page
                                                                            ----

Independent Auditors' Report                                                 F-2

Consolidated Financial Statements:
         Consolidated Balance Sheets - June 30, 2003 and 2002                F-3
         Consolidated Statements of Operations - Years ended
          June 30, 2003, 2002 and 2001                                       F-4
         Consolidated Statements of Stockholders' Equity -
          Years ended June 30, 2003, 2002 and 2001                           F-5
         Consolidated Statements of Cash Flows - Years ended
          June 30, 2003, 2002 and 2001                                       F-7
         Notes to Consolidated Financial Statements - Years ended
          June 30, 2003, 2002 and 2001                                       F-8

Consolidated Financial Statement Schedule:
         Schedule II - Valuation and Qualifying Accounts                    F-38


                                      F-1
<PAGE>

                          INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
Enzon Pharmaceuticals, Inc.:

We have audited the consolidated financial statements of Enzon Pharmaceuticals,
Inc. and subsidiaries as listed in the accompanying index. In connection with
our audits of the consolidated financial statements, we also have audited the
consolidated financial statement schedule as listed in the accompanying index.
These consolidated financial statements and consolidated financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these consolidated financial statements and
consolidated financial statement schedule based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Enzon
Pharmaceuticals, Inc. and subsidiaries as of June 30, 2003 and 2002, and the
results of their operations and their cash flows for each of the years in the
three-year period ended June 30, 2003, in conformity with accounting principles
generally accepted in the United States of America. Also in our opinion, the
related consolidated financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.


/s/KPMG LLP

Short Hills, New Jersey
August 13, 2003


                                      F-2
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                             June 30, 2003 and 2002
                (Dollars in thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                                         2003           2002
                                                                      ---------      ---------
<S>                                                                   <C>            <C>
ASSETS
 Current assets:
     Cash and cash equivalents                                        $  66,752      $ 113,858
      Short-term investments                                             25,047         75,165
      Accounts receivable, net                                           33,173         26,050
      Inventories                                                        11,786          2,214
      Deferred tax assets                                                14,564             --
      Other current assets                                                1,525          4,175
                                                                      ---------      ---------
Total current assets                                                    152,847        221,462
                                                                      ---------      ---------
Property and equipment, net                                              32,593         10,102
Marketable securities                                                    61,452        295,991
Investments in equity securities and convertible note                    56,364         48,382
Deferred tax assets                                                      52,889          8,342
Amortizable intangible assets, net                                      211,975         14,610
Goodwill                                                                150,985             --
Other assets                                                              9,461         11,859
                                                                      ---------      ---------
                                                                        575,719        389,286
                                                                      ---------      ---------
Total assets                                                          $ 728,566      $ 610,748
                                                                      =========      =========

LIABILITIES AND STOCKHOLDERS' EQUITY
 Current liabilities:
    Accounts payable                                                  $  12,809      $   4,526
    Accrued expenses                                                     12,450          6,175
    Accrued interest                                                      9,000          9,000
    Income taxes payable                                                  2,274             --
                                                                      ---------      ---------
Total current liabilities                                                36,533         19,701
                                                                      ---------      ---------
     Accrued rent                                                           449            552
     Notes payable                                                      400,000        400,000
                                                                      ---------      ---------
                                                                        400,449        400,552
                                                                      ---------      ---------
Commitments and contingencies
Stockholders' equity:
     Preferred stock-$.01 par value, authorized 3,000,000 shares;
       issued and outstanding, no shares in 2003 and 7,000 shares
       in 2002 (liquidation preference aggregating  $347 in 2002)            --             --
     Common stock-$.01 par value, authorized 90,000,000 shares
       issued and outstanding 43,518,359 shares in 2003 and
       42,999,823 shares in 2002                                            435            430
    Additional paid-in capital                                          322,488        262,854
    Accumulated other comprehensive income (loss)                          (159)         1,096
    Deferred compensation                                                (4,040)        (1,202)
    Accumulated deficit                                                 (27,140)       (72,683)
                                                                      ---------      ---------
Total stockholders' equity                                              291,584        190,495
                                                                      ---------      ---------
Total liabilities and stockholders' equity                            $ 728,566      $ 610,748
                                                                      =========      =========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.


                                      F-3
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                    Years ended June 30, 2003, 2002 and 2001
                (Dollars in thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                     2003          2002          2001
                                                  ---------      --------      --------
<S>                                               <C>            <C>           <C>
Revenues:
    Product sales, net                            $  59,264      $ 22,183      $ 20,769
    Manufacturing revenue                             8,742            --            --
    Royalties                                        77,589        53,329         8,251
    Contract revenue                                    811           293         2,568
                                                  ---------      --------      --------
    Total revenues                                  146,406        75,805        31,588
                                                  ---------      --------      --------
Costs and expenses:
   Cost of sales and manufacturing revenue           28,521         6,078         3,864
   Research and development                          20,969        18,427        13,052
   Selling, general and administrative               30,571        16,545        11,796
   Amortization of acquired intangibles               9,211           142            --
   Write-down of carrying value of investment        27,237            --            --
                                                  ---------      --------      --------

    Total costs and expenses                        116,509        41,192        28,712
                                                  ---------      --------      --------
    Operating income                                 29,897        34,613         2,876
                                                  ---------      --------      --------
Other income (expense):
    Interest and dividend income                      8,942        18,681         8,401
    Interest expense                                (19,828)      (19,829)         (275)
    Merger termination fee, net                      26,897            --            --
    Other                                                41         3,218            11
                                                  ---------      --------      --------
                                                     16,052         2,070         8,137
                                                  ---------      --------      --------
Income before tax provision (benefit)                45,949        36,683        11,013

   Tax provision (benefit)                              223        (9,123)         (512)
                                                  ---------      --------      --------

Net income                                        $  45,726      $ 45,806      $ 11,525
                                                  =========      ========      ========

Basic earnings per common share                   $    1.06      $   1.07      $   0.28
                                                  =========      ========      ========
Diluted earnings per common share                 $    1.05      $   1.04      $   0.26
                                                  =========      ========      ========

Weighted average number of common
 shares outstanding - basic                          43,116        42,726        41,602
                                                  =========      ========      ========
Weighted average number of common shares
and dilutive potential common shares
outstanding                                          43,615        44,026        43,606
                                                  =========      ========      ========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.


                                      F-4
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                    Years ended June 30, 2003, 2002 and 2001
                                 (In thousands)

<TABLE>
<CAPTION>
                                             Preferred stock        Common stock
                                         ----------------------   ---------------------
                                                                                         Additional     Other
                                         Number of       Par       Number of    Par        Paid-in   Comprehensive
                                           Shares       Value       Shares      Value      Capital   Income (Loss)
                                           ------       -----       ------      -----      -------   -------------
<S>                                         <C>       <C>            <C>      <C>         <C>          <C>
Balance, June 30, 2000                       7        $      --      40,838   $     408   $ 250,568           --
Common stock issued for exercise of
  non-qualified stock options               --               --       1,033          11       5,345           --
Issuance of restricted common stock         --               --          25          --       1,535           --
Common stock issued on conversion
  of common stock warrants                  --               --          94           1         168           --
Common stock issued for Independent
  Directors' Stock Plan                     --               --           1          --          66           --
Amortization of deferred compensation       --               --          --          --          --           --
Comprehensive income:
  Net income                                --               --          --          --          --           --
  Net change in unrealized gain on
  available for sale securities             --               --          --          --          --          885
                                          ----        ---------   ---------   ---------   ---------    ---------
Total comprehensive income                  --               --          --          --          --          885
                                          ----        ---------   ---------   ---------   ---------    ---------
Balance, June 30, 2001                       7               --      41,991         420     257,682          885
Common stock issued for exercise of
  non-qualified stock options                                --       1,009          10       5,172           --
Common stock issued for Independent
  Directors' Stock Plan                     --               --          --          --          --           --
Amortization of deferred compensation       --               --          --          --          --           --
Comprehensive income:
  Net income                                --               --          --          --          --           --
  Net change in unrealized gain on
    available for sale securities           --               --          --          --          --          211
                                          ----        ---------   ---------   ---------   ---------    ---------
Total comprehensive income                  --               --          --          --          --          211
                                          ----        ---------   ---------   ---------   ---------    ---------
Balance, June 30, 2002, carried forward      7               --      43,000   $     430   $ 262,854    $   1,096

<CAPTION>

                                           Deferred    Accumulated
                                         Compensation    Deficit      Total
                                         ------------    -------      -----
<S>                                       <C>          <C>          <C>
Balance, June 30, 2000                           --    ($130,014)   $ 120,962
Common stock issued for exercise of
  non-qualified stock options                    --           --        5,356
Issuance of restricted common stock          (1,535)          --           --
Common stock issued on conversion
  of common stock warrants                       --           --          169
Common stock issued for Independent
  Directors' Stock Plan                          --           --           66
Amortization of deferred compensation            26           --           26
Comprehensive income:
  Net income                                     --       11,525       11,525
  Net change in unrealized gain on
  available for sale securities                  --           --          885
                                          ---------    ---------    ---------
Total comprehensive income                       --       11,525       12,410
                                          ---------    ---------    ---------
Balance, June 30, 2001                       (1,509)    (118,489)     138,989
Common stock issued for exercise of
  non-qualified stock options                    --           --        5,182
Common stock issued for Independent
  Directors' Stock Plan                          --           --           --
Amortization of deferred compensation           307                       307
Comprehensive income:
  Net income                                     --       45,806       45,806
  Net change in unrealized gain on
    available for sale securities                --           --          211
                                          ---------    ---------    ---------
Total comprehensive income                       --       45,806       46,017
                                          ---------    ---------    ---------
Balance, June 30, 2002, carried forward     ($1,202)    ($72,683)   $ 190,495
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.


                                      F-5
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
           CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (continued)
                         Years ended 2003, 2002 and 2001
                                 (In thousands)

<TABLE>
<CAPTION>
                                                    Preferred stock          Common stock
                                                ------------------------  ---------------------
                                                                                                 Additional      Other
                                                   Number of     Par      Number of     Par       Paid-in    Comprehensive
                                                    Shares      Value      Shares      Value       Capital   Income (Loss)
                                                    ------      -----      ------      -----       -------   -------------
<S>                                                    <C>          <C>     <C>      <C>         <C>            <C>
Balance, June 30, 2002, brought forward                 7           --      43,000   $     430   $ 262,854      $   1,096
Common stock issued for exercise of
  non-qualified stock options                          --           --         305           3       1,370             --
Issuance of restricted common stock                    --           --         200           2       3,558             --
Amortization of deferred compensation                  --           --          --          --          --             --
Conversion and redemption of preferred stock           (7)          --          14          --         (25)            --
Dividends on preferred stock                           --           --          --          --          --             --
Tax benefit recognized related to stock option
  exercises                                            --           --          --          --      54,731             --
Comprehensive income:
  Net income                                           --           --          --          --          --             --
  Net change in unrealized gain on
    available for sale securities                      --           --          --          --          --         (1,255)
                                                     ----    ---------   ---------   ---------   ---------      ---------
  Total comprehensive income                           --           --          --          --          --         (1,255)
                                                     ----    ---------   ---------   ---------   ---------      ---------
Balance, June 30, 2003                                 --           --      43,519   $     435   $ 322,488          ($159)
                                                     ====    =========   =========   =========   =========      =========

<CAPTION>

                                                  Deferred    Accumulated
                                                Compensation    Deficit       Total
                                                ------------    -------       -----
<S>                                                <C>          <C>         <C>
Balance, June 30, 2002, brought forward            ($1,202)     ($72,683)   $ 190,495
Common stock issued for exercise of
  non-qualified stock options                                        --        1,373
Issuance of restricted common stock                 (3,560)          --           --
Amortization of deferred compensation                  722           --          722
Conversion and redemption of preferred stock            --           --          (25)
Dividends on preferred stock                            --         (183)        (183)
Tax benefit recognized related to stock option
  exercises                                             --           --       54,731
Comprehensive income:
  Net income                                            --       45,726       45,726
  Net change in unrealized gain on
    available for sale securities                       --           --       (1,255)
                                                 ---------    ---------    ---------
  Total comprehensive income                            --       45,726       44,471
                                                 ---------    ---------    ---------
Balance, June 30, 2003                             ($4,040)    ($27,140)   $ 291,584
                                                 =========    =========    =========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.


                                      F-6
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                    Years Ended June 30, 2003, 2002 and 2001
                             (Dollars in thousands)

<TABLE>
<CAPTION>
                                                                  2003         2002         2001
                                                                  ----         ----         ----
<S>                                                            <C>          <C>          <C>
Cash flows from operating activities:
    Net income                                                 $  45,726    $  45,806    $  11,525
    Adjustments to reconcile net income to
    net cash provided by operating activities:
      Depreciation and amortization                               13,264          972          587
      Amortization of bond premium/discount                       (1,261)      (2,680)        (831)
      Amortization of debt issue costs                             1,829        1,829           --
      Deferred income taxes                                       (4,379)      (9,000)          --
      Non-cash expense for issuances of common stock                 830          391          179
      Non-cash write down of carrying value of  investment        27,237           --           --
      Non-cash merger termination fee                            (34,552)          --           --
 Changes in operating assets and liabilities:
    Increase in accounts receivable, net                          (7,123)     (14,963)      (5,645)
    Increase in inventories                                       (1,000)        (362)        (906)
    (Increase) decrease in other current assets                    2,649       (1,337)        (567)
    (Increase) decrease in deposits                                  571         (386)        (101)
    Increase (decrease) in accounts payable                        8,283         (144)       2,205
    Increase (decrease) in accrued expenses                        6,276        1,981       (1,032)
    Increase in accrued interest                                      --        8,750          250
    Increase in income taxes payable                               2,274           --           --
    Decrease in accrued rent                                        (104)         (29)         (26)
                                                               ---------    ---------    ---------
      Net cash provided by operating activities                   60,520       30,828        5,638
                                                               ---------    ---------    ---------
Cash flows from investing activities:
    Purchase of property and equipment                           (11,225)      (7,503)      (2,079)
    Purchase of intangible asset                                      --      (15,000)          --
    Acquisition of ABELCET business                             (369,265)          --           --
    License of DEPOCYT product                                   (12,186)          --           --
    Purchase of cost method investments                               --      (48,341)          --
    Proceeds from sale of marketable securities                  369,226      270,549           25
    Purchase of marketable securities                           (142,232)    (511,997)    (163,241)
    Maturities of marketable securities                           57,000       80,260       45,303
    Decrease in long-term investments                                 --         (260)         (21)
                                                               ---------    ---------    ---------
      Net cash used in investing activities                     (108,682)    (232,292)    (120,013)
                                                               ---------    ---------    ---------
Cash flows from financing activities:
    Proceeds from issuance of common stock                         1,265        5,098        5,438
    Redemption of preferred stock                                    (26)          --           --
    Proceeds from issuance of notes                                   --           --      400,000
    Preferred stock dividend paid                                   (183)          --           --
    Debt issue costs                                                  --           --      (12,775)
                                                               ---------    ---------    ---------
      Net cash provided by financing activities                    1,056        5,098      392,663
                                                               ---------    ---------    ---------
        Net increase (decrease) in cash and cash equivalents     (47,106)    (196,366)     278,288
Cash and cash equivalents at beginning of year                   113,858      310,224       31,936
                                                               ---------    ---------    ---------
Cash and cash equivalents at end of year                       $  66,752    $ 113,858    $ 310,224
                                                               =========    =========    =========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.


                                      F-7
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                    Years ended June 30, 2003, 2002 and 2001

(1)   Company Overview

      Enzon Pharmaceuticals, Inc. ("Enzon" or "Company") is a biopharmaceutical
company that develops, manufactures and markets enhanced therapeutics for
life-threatening diseases through the application of its proprietary
technologies. The Company was originally incorporated in 1981. The Company's
operations include sales of ADAGEN(R), ONCASPAR(R), DEPOCYT (See Note 15) and
ABELCET (See Note 5), royalties on sales of PEG-INTRON(R), sales of its
products for research purposes, technology transfers and license fees. The
manufacturing and marketing of pharmaceutical products in the United States is
subject to stringent governmental regulation, and the sale of any of the
Company's products for use in humans in the United States requires the prior
approval of the United States Food and Drug Administration ("FDA").

(2)   Summary of Significant Accounting Policies

      Principles of Consolidation

      The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All intercompany balances and transactions
have been eliminated in consolidation. The preparation of financial statements
in conformity with accounting principles generally accepted in the United States
of America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.

      Cash Equivalents

      Cash equivalents consist primarily of U.S. Government instruments,
commercial paper, and money market funds. The Company considers all highly
liquid debt instruments with original maturities not exceeding three months to
be cash equivalents.

      Marketable Securities

      The Company classifies its investments in debt and marketable equity
securities as available-for-sale since the Company does not have the intent to
hold them to maturity. Debt and marketable equity securities are carried at fair
market value, with the unrealized gains and losses (which are deemed to be
temporary), net of related tax effect, included in the determination of
comprehensive income and reported in stockholders' equity. The fair value of
substantially all securities is determined by quoted market prices.

      The cost of the debt securities is adjusted for amortization of premiums
and accretion of discounts to maturity. The amortization, along with realized
gains and losses, is included in interest income. The cost of securities is
based on the specific identification method. Dividend and interest income are
recognized when earned.

      A decline in the market value of any security below cost that is deemed to
be other than temporary results in a reduction in carrying amount to fair value.
The impairment is charged to earnings and a new cost basis for the security is
established.


                                       F-8
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued

         The amortized cost, gross unrealized holding gains or losses, and fair
avalue for the Company's available-for-sale securities by major security type at
June 30, 2003 were as follows (in thousands):

                                          Gross         Gross
                                        Unrealized    Unrealized
                           Amortized      Holding       Holding     Fair Market
                             Cost          Gains        Losses        Value*
                          -----------   -----------   -----------   -----------
    U.S. Government
          agency debt     $    26,518   $       166   $        --   $    26,684
    U.S. corporate debt        59,804            11            --        59,815
                          -----------   -----------   -----------   -----------
                          $    86,322   $       177            --   $    86,499
                          ===========   ===========   ===========   ===========

      * Included in short-term investments $25,047 and marketable securities
$61,452.

      The amortized cost, gross unrealized holding gains or losses, and fair
value for securities available-for-sale by major security type at June 30, 2002
were as follows (in thousands):

                                           Gross         Gross
                                        Unrealized    Unrealized
                           Amortized      Holding       Holding     Fair Market
                             Cost          Gains        Losses        Value*
                          -----------   -----------   -----------   -----------
    U.S. Government
          agency debt     $   339,638   $     2,052   $        --   $   341,690
    U.S. corporate debt        29,764            --          (298)       29,466
                          -----------   -----------   -----------   -----------
                          $   369,402   $     2,052         ($298)  $   371,156
                          ===========   ===========   ===========   ===========

      * Included in short-term investments $75,165 and marketable securities
$295,991.

      The amortized cost, gross unrealized holding gains or losses, and fair
value for securities held-to-maturity by major security type at June 30, 2001
were as follows (in thousands):

                                            Gross         Gross
                                         Unrealized    Unrealized
                            Amortized      Holding       Holding     Fair Market
                              Cost          Gains        Losses        Value*
                           -----------   -----------   -----------   -----------
     U.S. Government
           agency debt     $    19,921   $       467   $        --   $    20,388
     U.S. corporate debt       171,807           520          (253)      172,074
     Foreign corporate debt     13,542           151            --        13,693
                           -----------------------------------------------------
                           $   205,270   $     1,138         ($253)  $   206,155
                           ===========   ===========   ===========   ===========

      * Included in short-term investments $129,520 and marketable securities
$76,635.


                                      F-9
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued

      Gross realized gains from the sale of investment securities include in
income for the year ended June 30, 2003, 2002 and 2001 were $2.3 million, $1.2
million and $178,000, respectively.

      Maturities of debt securities classified as available-for-sale at June 30,
2003 were as follows (in thousands):

                                      Amortized Cost        Fair Market Value
         Years ended June 30,       ------------------    ----------------------
         2004                            $24,747                  $25,047
         2005                             27,716                   27,739
         2006                             33,859                   33,713
                                         -------                  -------
                                         $86,322                  $86,499
                                         =======                  =======

      Financial instruments

      The carrying values of cash and cash equivalents, accounts receivable,
other assets, accounts payable and accrued expenses included in the Company's
consolidated balance sheets approximated their fair values at June 30, 2003 and
2002.

      Revenue Recognition

      Revenues from product sales and manufacturing revenue are recognized at
the time of shipment and a provision is made at that time for estimated future
credits, chargebacks, sales discounts, rebates and returns (estimates are based
on historical trends). These sales provision accruals are presented as a
reduction of the accounts receivable balances and totaled $8.1 million,
including $6.3 million of reserve for chargebacks, as of June 30, 2003. The
Company continually monitors the adequacy of the accrual by comparing the actual
payments to the estimates used in establishing the accrual. The Company ships
product to customers FOB shipping point and utilizes the following criteria to
determine appropriate revenue recognition: pervasive evidence of an arrangement
exists, delivery has occurred, selling price is fixed and determinable and
collection is reasonably assured.

      Royalties under the Company's license agreements with third parties are
recognized when earned through the sale of product by the licensor. The Company
does not participate in the selling or marketing of products for which it
receives royalties.

      Contract revenues are recorded as the earnings process is completed.
Non-refundable milestone payments that represent the completion of a separate
earnings process are recognized as revenue when earned, upon the occurrence of
contract-specified events and when the milestone has substance. Non-refundable
payments received upon entering into license and other collaborative agreements
where the Company has continuing involvement are recorded as deferred revenue
and recognized ratably over the estimated service period.

      Inventories

      Inventories are carried at the lower of cost or market. Cost is determined
using the first-in, first-out (FIFO) method and includes the cost of raw
materials, labor and overhead.


                                      F-10
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued

      Property and Equipment

      Property and equipment are stated at cost. Depreciation of fixed assets is
provided by straight-line methods over estimated useful lives. When assets are
retired or otherwise disposed of, the cost and related accumulated depreciation
are removed from the accounts, and any resulting gain or loss is recognized in
operations for the period. Amortization of leasehold improvements is calculated
using the straight-line method over the remaining term of the lease or the life
of the asset, whichever is shorter. The cost of repairs and maintenance is
charged to operations as incurred; significant renewals and improvements are
capitalized.

      Business Combinations

      In July 2001, the FASB issued SFAS No. 141, Business Combinations, SFAS
No. 141 requires that all business combinations be accounted for under a single
method--the purchase method. Use of the pooling-of-interests method no longer is
permitted. SFAS No. 141 requires that the purchase method be used for business
combinations initiated after June 30, 2001. Subsequent to SFAS 141 becoming
effective, the Company completed the acquisition of ABELCET product line, which
was accounted for using the purchase method of accounting.

      Goodwill and Other Intangible Assets

      Goodwill represents the excess of costs over the fair value of
identifiable net assets of businesses acquired. The Company adopted the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 142,
Goodwill and Other Intangible Assets, as of July 1, 2002. In accordance with the
provisions of SFAS No. 142, goodwill and intangible assets determined to have an
indefinite useful life acquired in a purchase business combination, are not
subject to amortization, are tested at least annually for impairment, and are
tested for impairment more frequently if events and circumstances indicate that
the asset might be impaired. Goodwill is reviewed for impairment by comparing
the carrying value to its fair value. Recoverability of amortizable intangible
assets is determined by comparing the carrying amount of the asset to the future
undiscounted net cash flow to be generated by the asset. The evaluations involve
amounts that are based on management's best estimate and judgment. Actual
results may differ from these estimates. If recorded values are less than the
fair values, no impairment is indicated. SFAS No. 142 also requires that
intangible assets with estimated useful lives be amortized over their respective
estimated useful lives.

      At the time of adoption of SFAS No. 142, the Company did not have any
goodwill or other intangible assets with an indefinite useful life. As of June
30, 2003, the Company does not have intangibles with indefinite useful lives,
other than goodwill.

      Long-Lived Assets

      SFAS No. 144 provides a single accounting model for long-lived assets to
be disposed of SFAS No. 144 also changes the criteria for classifying an asset
as held for sale and broadens the scope of businesses to be disposed of that
qualify for reporting as discontinued operations and changes the timing of
recognizing losses on such operations. The Company adopted SFAS No. 144 on July
1, 2002. The adoption of SFAS No. 144 did not affect the Company's financial
statements.


                                      F-11
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued

      In accordance with SFAS No. 144, long-lived assets, such as property,
plant, and equipment and purchased intangibles subject to amortization are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount of
an asset to estimated undiscounted future cash flows expected to be generated by
the asset. If the carrying amount of an asset exceeds its estimated future cash
flows, an impairment charge is recognized by the amount by which the carrying
amount of the asset exceeds the fair value of the asset. Assets to be disposed
of would be separately presented in the consolidated balance sheet and reported
at the lower of the carrying amount or fair value less costs to sell, and are no
longer depreciated. The assets and liabilities of a disposed group classified as
held for sale would be presented separately in the appropriate asset and
liability sections of the consolidated balance sheet.

      Prior to the adoption of SFAS No. 144, the Company accounted for
long-lived assets in accordance with SFAS No. 121, Accounting for Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of.

      Derivative Financial Instruments

      The Company addresses certain financial exposures through a controlled
program of risk management that, at times subsequent to June 30, 2003, includes
the use of derivative financial instruments. The Company does not use derivative
financial instruments for trading or speculative purposes. In August 2003, the
Company entered into a Zero Cost Protective Collar arrangement with a financial
institution to reduce the exposure associated with the shares of NPS
Pharmaceuticals received in June 2003 as a result of the termination of the
proposed merger between the Company and NPS Pharmaceuticals (see Note 13). The
contract has been designated as a fair value hedge and accordingly, the change
in fair value of the derivative will be recorded in other comprehensive income
or in the income statement depending on its effectiveness in fiscal year 2004
and beyond. The Company formally assesses, both at inception of the hedge and on
an ongoing basis, whether a derivative is highly effective in offsetting changes
in fair value of the hedged item. If it is determined that a derivative is not
highly effective as a hedge or if a derivative ceases to be a highly effective
hedge, the Company discontinues hedge accounting prospectively.

      Research and Development

      All research and development costs are expensed as incurred. These include
the following types of costs incurred in performing research and development
activities: salaries and benefits, allocated overhead and occupancy costs,
clinical trial and related clinical manufacturing costs, contract services and
other outside costs.

      Income Taxes

      The Company utilizes the asset and liability method of accounting for
income taxes. Under this method, deferred tax assets and liabilities are
determined based on the difference between the financial statement carrying
amounts and tax bases of assets and liabilities using enacted tax rates in
effect for years in which the temporary differences are expected to reverse. Tax
benefits for stock option exercise deductions are recognized as an increase in
additional paid in capital.


                                      F-12
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued

      Stock-Based Compensation Plans

      The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board ("APB") Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations, in accounting for its
fixed plan stock options. As such, compensation expense would be recorded on the
date of grant of options to employees and members of the Board of Directors only
if the current market price of the underlying stock exceeded the exercise price.
SFAS No. 123, Accounting for Stock-Based Compensation, established accounting
for stock-based employee compensation plans. As allowed by SFAS No. 123, the
Company has elected to continue to apply the intrinsic value-based method of
accounting described above, and has adopted the disclosure requirements of SFAS
No. 123, as amended.

      When the exercise price of employee or director stock options is less than
the fair value of the underlying stock on the grant date, the Company records
deferred compensation for the difference and amortizes this amount to expense
over the vesting period of the options. Options or stock awards issued to
non-employees and consultants are recorded at their fair value as determined in
accordance with SFAS No. 123 and EITF No. 96-18, Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services and recognized over the related
vesting period.

      The following table illustrates the effect on net income and net income
per share as if the fair-value-based method under SFAS No. 123 had been applied
(in thousands, except per share amounts):

<TABLE>
<CAPTION>
                                                                     Years ended June 30,
                                                                 -----------------------------
                                                                  2003       2002       2001
                                                                  ----       ----       ----
<S>                                                              <C>        <C>        <C>
Net income applicable to common stockholders:
  As reported                                                    $45,726    $45,806    $11,525
  Add stock-based employee compensation
       expense included in reported net income, net of tax (1)       433        307         26
  Deduct total stock-based employee
       compensation expense determined under
       fair-value-based method for all awards, net of tax (1)     (8,933)   (22,751)    (9,916)
                                                                 -------    -------    -------
  Pro forma                                                      $37,226    $23,362    $ 1,635
                                                                 =======    =======    =======

Net income per common share-basic:
  As reported                                                    $  1.06    $  1.07    $  0.28
  Pro forma                                                      $  0.86    $  0.55    $  0.04
Net income per common share-diluted
  As reported                                                    $  1.05    $  1.04    $  0.26
  Pro forma                                                      $  0.85    $  0.53    $  0.04
</TABLE>

      (1) Information for 2003 has been tax effected using a 40% estimated tax
rate. Information for 2002 and 2001 has not been tax effected as a result of the
Company's utilization of net operating loss carryforwards in those years.


                                      F-13
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued

      The pro forma effects on net income applicable to common stockholders and
net income per common share for 2003, 2002 and 2001 may not be representative of
the pro forma effects in future years since compensation cost is allocated on a
straight-line basis over the vesting periods of the grants, which extends beyond
the reported years.

      The weighted-average fair value per share was $12.50, $29.27 and $40.19
for stock options accounted for under SFAS No. 123 and EITF No. 96-18 granted in
2003, 2002 and 2001, respectively. The Company estimated the fair values using
the Black-Scholes option pricing model and used the following assumptions:

                                                   Years ended June 30,
                                                --------------------------
                                                2003       2002       2001
                                                ----       ----       ----
      Risk-free interest rate                   2.97%      4.00%      5.72%
      Expected stock price volatility             75%        78%        83%
      Expected term until exercise (years)      4.21       4.23       4.28
      Expected dividend yield                      0%         0%         0%

      Cash Flow Information

      Cash payments for interest were approximately $18.0 million, $9.3 million
and $25,000 for the years ended June 30, 2003, 2002 and 2001, respectively.
There were $2.1 million of tax payments made for the year ended June 30, 2003.
There were no income tax payments made for the years ended June 30, 2002 and
2001.

      Reclassifications

      The Company made certain reclassifications to the 2002 and 2001 financial
statements to conform to the 2003 presentation.

(3)   Comprehensive Income

      SFAS No. 130, "Reporting Comprehensive Income," establishes standards for
reporting and presentation of comprehensive income and its components in a full
set of financial statements. Comprehensive income consists of net income and net
unrealized gains (losses) on securities and is presented in the consolidated
statements of stockholders' equity .


                                      F-14
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued

      The following table reconciles net income to comprehensive income (in
thousands):

                                                             June 30,
                                                  -----------------------------
                                                    2003       2002      2001
                                                  --------    -------   -------
      Net income                                  $ 45,726    $45,806   $11,525
        Unrealized gain (loss) on securities
          that arose during the year
          net of tax provision (benefit) of
          ($345,000), $658,000 and $0 for
          2003, 2002 and 2001, respectively          1,007        211       885
        Reclassification adjustment for gain
          included in net income                    (2,262)        --        --
                                                  --------    -------   -------
                                                    (1,255)       211       885
                                                  --------    -------   -------
      Total comprehensive income                  $ 44,471    $46,017   $12,410
                                                  ========    =======   =======

(4)   Earnings Per Common Share

      Basic earnings per share is computed by dividing the net income available
to common stockholders adjusted for only cumulative undeclared preferred stock
dividends for the relevant period, by the weighted average number of shares of
Common Stock issued and outstanding during the periods. For purposes of
calculating diluted earnings per share for the years ended June 30, 2003, 2002
and 2001, the denominator includes both the weighted average number of shares of
Common Stock outstanding and the number of dilutive Common Stock equivalents.
The number of dilutive Common Stock equivalents includes the effect of
non-qualified stock options calculated using the treasury stock method and the
number of shares issuable upon conversion of the outstanding Series A Preferred
Stock. The number of shares issuable upon conversion of the Company's 4.5%
Convertible Subordinated Notes due 2008 (the "Notes") and the effect of the
vesting of certain restricted stock using the treasury stock method have not
been included as the effect of their inclusion would be antidilutive. As of June
30, 2003, 2002 and 2001, the Company had 6,514,000, 6,955,000 and 9,866,000
dilutive potential common shares outstanding respectively, that could
potentially dilute future earnings per share calculations.


                                      F-15
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued

      The following table represents the reconciliation of the numerators and
denominators of the basic and diluted EPS computations for net earnings
available for Common Stockholders for the years ended June 30, 2003, 2002 and
2001 (in thousands):

<TABLE>
<CAPTION>
                                                               Years ended June 30,
                                                         ------------------------------
                                                           2003       2002       2001
                                                         --------   --------   --------
<S>                                                      <C>        <C>        <C>
      Net income                                         $ 45,726   $ 45,806   $ 11,525
      Less:  preferred stock dividends                         11         14         14
                                                         --------   --------   --------
      Net income available to common
      stockholders                                       $ 45,715   $ 45,792   $ 11,511
                                                         ========   ========   ========

      Weighted average number of
         common shares issued and
         outstanding - basic                               43,116     42,726     41,602
      Effect of dilutive common stock equivalents:
         Conversion of preferred stock                         13         16         16
         Exercise of non-qualified
           stock options                                      486      1,284      1,988
                                                         --------   --------   --------
                                                           43,615     44,026     43,606
                                                         ========   ========   ========
</TABLE>

(5)   Business Combination

      (a)   Acquisition of ABELCET Product Line

            On November 22, 2002, the Company acquired the North American rights
and operational assets associated with the development, manufacture, sales and
marketing of ABELCET(R) (Amphotericin B Lipid Complex Injection) (the "ABELCET
Product Line") from Elan Corporation, plc, for $360.0 million plus acquisition
costs of approximately $9.3 million. The acquisition is being accounted for by
the purchase method of accounting in accordance with SFAS No. 141 "Business
Combinations", with the results of operations and cash flows for the ABELCET
Product Line included in the Company's consolidated results from the date of
acquisition.

            The total purchase price of the acquisition was (in thousands):

             Cash                                         $360,000
             Acquisition costs, primarily legal,
                 investment banking and accounting fees      9,264
                                                          --------
                                                          $369,264
                                                          ========

         The purchase price was allocated to the tangible and identifiable
intangible assets acquired based on their estimated fair values at the
acquisition date. The excess of the purchase price over the fair value of
identifiable assets and liabilities acquired amounted to $151.0 million and was
allocated to goodwill.


                                      F-16
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued

      The following table summarizes the estimated fair values of the assets
acquired as of the acquisition date (in thousands):

      Inventories                              $  8,572
      Property, plant and equipment              13,707
      Amortizable intangible assets             196,000
      Goodwill                                  150,985
                                               --------
                                               $369,264
                                               ========

      Property, plant and equipment and intangible assets were recorded at
the estimated fair value of the assets. Amortizable intangible assets include
the following components as determined by a third party valuation (in
thousands):
                                                       Estimated
                                                         lives
                                                       ---------

      Product Patented Technology           $ 64,400   12 years
      Manufacturing Patent                    18,300   12 years
      NDA Approval                            31,100   12 years
      Trade name and other product rights     80,000   15 years
      Manufacturing Contract                   2,200    3 years
                                            --------
                                            $196,000
                                            ========

      Amortization expense for these intangibles and certain other product
acquisition costs (See Note 15) for the next five fiscal years is expected to be
approximately $15.5 million per year. Goodwill will not be amortized but will be
tested for impairment at least annually. For income tax purposes, the entire
amount of goodwill is deductible and is being amortized over a 15 year period.

      (b) Elan Manufacturing Agreements

      As a part of the ABELCET acquisition, the Company entered into a long-term
manufacturing and supply agreement with Elan, whereby it manufactures two
products for Elan, ABELCET and MYOCET. Under the terms of the ABELCET
acquisition agreement, Elan has retained the rights to market ABELCET in any
markets outside of the US, Canada and Japan.

      The manufacturing agreement with Elan requires the Company to supply Elan
with ABELCET and MYOCET through November 21, 2011. From the period November 22,
2002 until June 30, 2004, the Company is supplying ABELCET and MYOCET at fixed
transfer prices which approximates its manufacturing cost. From July 1, 2004 to
the termination of the agreement, the Company will supply these products at
manufacturing cost plus fifteen percent.

      The agreement also provides that until June 30, 2004, Enzon shall
calculate the actual product manufacturing costs on an annual basis and, to the
extent that this amount is greater than the respective transfer prices, Elan
shall reimburse Enzon for such differences. Conversely, if such actual
manufacturing costs are less than the transfer price, Enzon shall reimburse Elan
for such differences. In addition, for the periods from closing to June 30, 2003
and the one year period ended June 30, 2004, respectively, Elan is responsible
for reimbursing Enzon for Elan's share of the plant's excess capacity for such
periods. This calculation is based on Elan's portion of the total products
manufactured at the plant.


                                      F-17
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued

      (c) Pro Forma Financial Information

      The unaudited pro forma results of operations is presented for
illustrative purposes only and is not necessarily indicative of the operating
results that would have occurred if the transaction had been consummated at the
dates indicated, nor is it necessarily indicative of future operating results of
the combined companies and should not be construed as representative of these
amounts for any future dates or periods.

      The following unaudited pro forma results of operations of the Company for
the year ended June 30, 2003 and 2002, respectively, assumes the acquisition of
the ABELCET Product Line occurred as of July 1, 2001 and assumes the purchase
price has been allocated to the assets purchased based on fair values at the
date of acquisition (in thousands, except per share amounts):

                                               Years ended June 30,
                                              -----------------------
                                                  2003       2002
                                                  ----       ----
                                                   (Unaudited)

        Product sales                           $104,408   $118,672
        Total revenues                           182,808    173,294
        Net income                                45,240     60,416
        Pro forma earnings per share:
           Basic                                $   1.05   $   1.41
           Diluted                              $   1.04   $   1.37

(6)   Inventories

      Inventories consist of the following (in thousands):

                                                Years ended June 30,
                                              -----------------------
                                                  2003       2002
                                                  ----       ----
          Raw materials                         $  4,349   $    827
          Work in process                          3,392      1,043
          Finished goods                           4,045        344
                                                --------   --------
                                                $ 11,786   $  2,214
                                                ========   ========


                                      F-18
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued

(7)   Property and Equipment

      Property and equipment consist of the following (in thousands):

                                                                Estimated
                                         Years ended June 30,  useful lives
                                         --------------------  ------------
                                             2003      2002
                                             ----      ----
        Land                              $ 1,500   $    --
        Building                            4,800        --        7 years
        Leasehold improvements             13,881     8,690     3-15 years
        Equipment                          21,097     9,123      3-7 years
        Furniture and fixtures              2,564     1,362        7 years
        Vehicles                               55        55        3 years
                                          -------   -------
                                           43,897    19,230
        Less:  Accumulated depreciation
         and amortization                  11,304     9,128
                                          -------   -------
                                          $32,593   $10,102
                                          =======   =======

      During the years ended June 30, 2003 and 2002, the Company's fixed asset
disposals were approximately $270,000 and $1,454,000, respectively. The Company
also disposed of $269,000 and $1,454,000 in fully depreciated assets during the
year ended June 30, 2003 and 2002, respectively.

      Depreciation and amortization charged to operations relating to property
and equipment totaled $2,444,000, $817,000 and $442,000 for the years ended June
30, 2003, 2002 and 2001, respectively.

(8)   Accrued Expenses

      Accrued expenses consist of (in thousands):

                                    Years ended June 30,
                                    --------------------
                                        2003     2002
                                        ----     ----
        Accrued wages and vacation   $ 4,157   $3,685
        Accrued Medicaid rebates       1,904    1,418
        Unearned revenue               3,146      183
        Other                          3,243      889
                                     -------   ------
                                     $12,450   $6,175
                                     =======   ======

(9)   Long-term debt

      In June 2001, the Company completed a private placement of $400.0 million
in Convertible Subordinated Notes due July 1, 2008 (the "Notes"). The Company
received net proceeds from this offering of $387.2 million, after deducting
costs associated with the offering. The net amount of the debt issue costs
totaled $9.1 million at June 30, 2003 and are included in other assets in the
accompanying balance sheet. The Notes bear interest at an annual rate of 4.5%.
Accrued interest on the Notes was approximately $9.0 million as of June 30,
2003. The holders may convert all or a portion of the Notes into Common Stock at
any time on or before July 1, 2008. The Notes are convertible into Common Stock
at a conversion price of $70.98 per share, subject to adjustment in certain
events. The Notes are subordinated to all existing and future senior
indebtedness. On or after July 7, 2004, the Company may redeem any or all of the
Notes at specified redemption prices, plus accrued and unpaid interest to the
day preceding the redemption date. Upon the occurrence of a "fundamental
change", as defined in the indenture governing the Notes, holders of the Notes
may require the Company to redeem the Notes at a price equal to 100 percent of
the principal amount. In August 2001, the Company filed a registration statement
which was declared effective by the U.S. Securities and Exchange Commission
covering the resale of the Notes and the Common Stock issuable upon conversion
of the Notes. The fair value of the 4.5% Notes was approximately $327.0 million
and $286.5 million at June 30, 2003 and 2002, respectively.

                                      F-19
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued



(10)  Stockholders' Equity

      During May 2002, the Company adopted a shareholder rights plan ("Rights
Plan"). The Rights Plan involves the distribution of one preferred share
purchase right ("Right") as a dividend on each outstanding share of the
Company's common stock to each holder of record on June 3, 2002. Each right
shall entitle the holder to purchase one-thousandth of a share of Series B
Preferred Stock ("Preferred Shares") of the Company at a price of $190.00 per
one-thousandth of Preferred Share. The Rights are not immediately exercisable
and will become exercisable only upon the occurrence of certain events. If a
person or group acquires, or announces a tender or exchange offer that would
result in the acquisition of 15 percent or more of the Company's common stock
while the stockholder rights plan remains in place, then, unless (1) the rights
are redeemed by the Company for $0.01 per right or (2) the Board of Directors
determines that a tender or exchange offer for all of the outstanding Common
Stock of the Company is in the best interest of the Company and the
stockholders, the rights will be exercisable by all right holders except the
acquiring person or group for one share of the Company or in certain
circumstances, shares of the third party acquiror, each having a value of twice
the Right's then-current exercise price. The Rights will expire on May 16, 2012.

      Series A Preferred Stock

      During the year ended June 30, 2003, the remaining outstanding 6,000
shares of the Company's Series A Preferred Stock were converted to 13,636 shares
of Common Stock. Accrued dividends of $156,000 on the Series A Preferred Shares
that were converted, were settled by cash payments. Additionally, cash payments
totaling $4.00 were made for fractional shares related to the conversions.
During the fiscal year ended June 30, 2003 the remaining 1,000 shares of Series
A Preferred Stock were redeemed and settled by a cash payment of $25,000 and
accrued dividends of $26,000. There were no conversions of Series A Cumulative
Convertible Preferred Stock ("Series A Preferred Stock" or "Series A Preferred
Shares") during the years ended June 30, 2002 and 2001.

      The Company's Series A Preferred Shares were convertible into Common Stock
at a conversion rate of $11 per share. The value of the Series A Preferred
Shares for conversion purposes was $25 per share. Holders of the Series A
Preferred Shares were entitled to an annual dividend of $2 per share, payable
semiannually, but only when and if declared by the Board of Directors, out of
funds legally available. As of June 30, 2002 and 2001, undeclared accrued
dividends in arrears were $172,000 or $24.54 per share and $158,000 or $22.54
per share, respectively. Due to the conversion or redemption of all Series A
Preferred shares prior to June 30, 2003 all dividends have been settled as of
June 30, 2003.


                                      F-20
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued

      Common Stock

      During the year ended June 30, 2003, the Company issued 200,000 shares of
restricted common stock to its President and Chief Executive Officer. Total
compensation expense of approximately $3.6 million, calculated based on the fair
value of the shares on the issuance date, is being recognized in 2003 over the
five year vesting period.

      During the year ended June 30, 2001, the Company issued 25,000 shares of
restricted Common Stock to its President and Chief Executive Officer. Such
shares were issued in conjunction with an employment agreement and vest ratably
over five years. Total compensation expense of approximately $1.5 million is
being recognized over the five year vesting period.

      The board of directors has the authority to issue up to 3.0 million shares
of preferred stock, par value $0.01 per share, and to determine the price and
terms, including preferences and voting rights, of those shares without
stockholder approval.

      Holders of shares of Common Stock are entitled to one vote per share on
matters to be voted upon by the stockholders of the Company.

      As of June 30, 2003, the Company has reserved its common shares for
special purposes as detailed below (in thousands):

        Non-Qualified and Incentive Stock Option Plans            4,689
        Shares issuable upon conversion of Notes                  5,635
                                                                 ------
                                                                 10,324
                                                                 ======

      In August 2003, the Company issued 155,000 shares of restricted common
stock to certain executives. Total compensation expense of $1.76 million will be
recognized beginning in fiscal 2004 over a five year period.

      Common Stock Warrants

      As of June 30, 2003, 2002 and 2001, there were no warrants outstanding.

      During the year ended June 30, 2001, warrants were exercised to purchase
94,000 shares of the Company's Common Stock. Of this amount, 34,000 warrants
were issued in connection with the Company's January and March 1996 private
placements of Common Stock and 60,000 were issued during the year ended June 30,
1999 as compensation for consulting services.


                                      F-21
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued

(11)  Independent Directors' Stock Plan

      On December 3, 1996, the stockholders voted to approve the Company's
Independent Directors' Stock Plan, which provides for compensation in the form
of quarterly grants of Common Stock to non-executive, independent directors
serving on the Company's Board of Directors. Each independent director is
granted shares of Common Stock equivalent to $2,500 per quarter plus $500 per
Board of Director's meeting attended. The number of shares issued is based on
the fair market value of Common Stock on the last trading day of the applicable
quarter. In October 2000, the Compensation Committee of the Board of Directors
amended the Plan to provide that the Independent Directors will be entitled to
elect to receive up to 50% of the fees payable in cash with the remainder of the
fee to be paid in Common Stock. During the years ended June 30, 2003, 2002 and
2001, the Company issued 2,500, 1,000 and 1,000 shares of Common Stock,
respectively, to independent directors, pursuant to the Independent Directors'
Stock Plan. The stock payments are included in stockholders equity. Commencing
with the stock issuable for the quarter ended March 31, 2002, the Compensation
Committee has determined to issue the common stock previously issuable to the
independent directors under the Independent Director's Stock Plan under the
Company's 2001 Incentive Stock Plan which was approved by the Company's
stockholders in December 2001.

      Through December 31, 2002, the Company's Independent Directors received
compensation for serving on the Board of Directors payable in shares of the
Company's common stock or a combination of shares of common stock and cash under
the Company's Independent Directors Stock Plan. In September of 2002 the
Compensation Committee of the Board of Directors decided to terminate the
Independent Directors Stock Plan as a stand-alone plan and to instead issue
shares of the Company's common stock under the Independent Directors Stock Plan
pursuant to the 2001 Incentive Stock Plan. During fiscal 2003, each Independent
Director was entitled to compensation of $2,500 per quarter and $500 for each
meeting attended by such Independent Director under the Independent Director's
Stock Plan. In 2002, in connection with the reduction of shares subject to the
option granted under the regular grant to Independent Directors the Compensation
Committee of the Board of Directors approved a change, effective for the quarter
ended March 31, 2002 and for each quarter thereafter, to the compensation under
the Independent Directors Stock Plan to include the payment of $500 for
committee meetings attended by the Independent Directors which are held on a day
when no Board of Directors meeting is held. Under the Independent Directors'
Stock Plan the Independent Directors are entitled to elect to receive up to 50%
of the fees payable under the Independent Directors' Stock Plan in cash, with
the remainder of the fees to be paid in shares of the Company's common stock.
Fees payable and shares issuable under the Independent Director's Stock Plan are
paid annually at the end of the calendar year.

(12)  Stock Option Plans

      As of June 30, 2003, 4,689,000 shares of Common Stock were reserved for
issuance pursuant to options under two separate plans, the Non-Qualified Stock
Option Plan (the "Stock Option Plan") and the 2001 Incentive Stock Plan (the
"2001 Incentive Stock Plan"), which may be granted to employees, non-employee
directors or consultants to the Company. The exercise price of the options
granted must be at least 100% of the fair market value of the stock at the time
the option is granted. Options may be exercised for a period of up to ten years
from the date they are granted.


                                      F-22
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued

      In November 1987, the Company's Board of Directors adopted a Non-Qualified
Stock Option Plan (the "Stock Option Plan"). Some of the options granted contain
accelerated vesting provisions, under which the vesting and exercisability of
such shares will accelerate if the closing price of the Company's Common Stock
exceeds $100 per share for at least twenty consecutive days as reported by the
NASDAQ National Market. The other terms and conditions of the options generally
are to be determined by the Board of Directors, or an option committee appointed
by the Board, at their discretion.

      In October 2001, the Board of Directors adopted, and in December 2001 the
stockholders approved, the 2001 Incentive Stock Plan. The 2001 Incentive Stock
Plan provides for the grant of stock options and other stock-based awards to
employees, officers, directors, consultants, and independent contractors
providing services to Enzon and its subsidiaries as determined by the Board of
Directors or by a committee of directors designated by the Board of Directors to
administer the 2001 Incentive Stock Plan.

      The following is a summary of the activity in the Company's Stock Option
Plans which include the 1987 Non-Qualified Stock Option Plan and the 2001
Incentive Stock Plan (shares in thousands):

<TABLE>
<CAPTION>
                                                                        Weighted
                                                                        Average
                                                                        Exercise           Range of
                                                           Shares        Price              Prices
                                                           ------        -----              ------
<S>                                                        <C>           <C>           <C>
Outstanding at June 30, 2000                               3,206         $ 7.35        $  1.88 to $69.50

 Granted at exercise prices which equaled
  the fair market value on the date of grant               1,150         $56.79        $ 44.75 to $73.22
 Exercised                                                (1,033)        $ 5.25        $  2.06 to $39.94
 Canceled                                                    (39)        $36.31        $ 14.13 to $58.63
                                                          ------
Outstanding at June 30, 2001                               3,284         $24.98        $  1.88 to $73.22

 Granted at exercise prices which equaled
  the fair market value on the date of grant               1,399         $44.39        $ 25.10 to $65.86
 Exercised                                                (1,008)        $ 4.13        $  2.00 to $37.38
 Canceled                                                    (31)        $41.56        $ 22.31 to $70.69
                                                          ------
Outstanding at June 30, 2002                               3,644         $38.07        $  1.88 to $73.22

 Granted at exercise prices which equaled
  the fair market value on the date of grant               1,133         $19.65        $ 11.35 to $24.76
 Exercised                                                  (305)        $ 4.49        $  2.03 to $14.13
 Canceled                                                   (534)        $40.63        $ 11.70 to $71.00
                                                          ------
Outstanding at June 30, 2003                               3,938         $35.02        $  1.88 to $73.22
                                                          ======
</TABLE>

      Of the options the Company granted for 245,000 options and 700,000 options
for fiscal year ended June 30, 2002 and 2001, respectively contain accelerated
vesting provisions based on the achievement of certain milestones.


                                      F-23
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued

      As of June 30, 2003, the Stock Option Plans had options outstanding and
exercisable by price range as follows (shares in thousands):

<TABLE>
<CAPTION>
                                                Weighted
                                                Average        Weighted                     Weighted
            Range of                           Remaining       Average                      Average
            Exercise           Options        Contractual      Exercise      Options        Exercise
             Prices          Outstanding          Life          Price      Exercisable       Price
             ------          -----------          ----          -----      -----------       -----
<S>                              <C>              <C>           <C>            <C>           <C>
        $1.87  - $ 6.50            499            3.69          $ 4.44           499         $ 4.44
        $11.35 - $16.86            209            7.70          $14.48           104         $14.79
        $16.97 - $17.80            287            9.43          $17.75            --             --
        $18.04 - $22.31            470            9.06          $20.09            27         $22.31
        $23.03 - $28.17            635            8.97          $26.52           104         $28.07
        $29.75 - $44.75            539            7.41          $43.10           230         $42.62
        $45.98 - $57.67            770            8.42          $54.55           239         $55.22
        $58.38 - $70.00            497            7.84          $67.99           375         $67.84
        $71.00 - $73.22             32            7.32          $71.24            14         $71.22
                                 -----                                         -----
                                 3,938            7.88          $35.02         1,592         $35.62
                                 =====                                         =====
</TABLE>

      In August 2003, the Company granted 256,000 options to its employees at an
exercise price of $11.37 under its Stock Option Plan (fair value on the date of
grant). The options vest over a period of four years.

(13)  Merger Termination Agreement

      On February 19, 2003, the Company entered into an agreement and plan of
merger with NPS Pharmaceuticals, Inc. ("NPS"). On June 4, 2003, the merger
agreement was terminated. In accordance with the mutual termination agreement
between the two companies, the Company received 1.5 million shares of NPS common
stock. The termination agreement imposes certain restrictions with respect to
the transferability of the underlying shares including limiting the maximum
number of shares that can be transferred each month after the registration
statement relating to the shares is declared effective to 125,000 shares.
Considering such restrictions, 1.1 million shares were valued at the fair value
of NPS stock on June 4, 2003 in accordance with SFAS 115, Accounting for Certain
Investments in Debt and Equity Securities (SFAS 115) of $26.7 million and the
balance of 375,000 shares were considered as restricted stock as defined under
the scope exception provisions of SFAS 115. The restricted stock was valued at
$7.8 million by applying a 12% discount on the related fair value based on a
valuation performed by an independent third-party consulting firm. Total
consideration received aggregated $34.6 million. The Company also recorded $7.7
million in costs incurred related to the proposed merger with NPS (primarily
investment banking, legal and accounting fees). The net gain of approximately
$26.9 million was recorded as other income in the Consolidated Statement of
Operations for the year ended June 30, 2003.

      As of June 30, 2003, the investment in NPS shares of common stock was
valued at $35.2 million, which is included in investments in equity securities
and convertible note on the accompanying balance sheet, the composition of which
was as follows (in thousands):

       Valued at fair value (including unrealized gain of $667)   $27,382

       Valued as restricted stock                                   7,837
                                                                  -------
                                                                  $35,219
                                                                  =======


                                      F-24
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued

      In August 2003, the Company entered into a Zero Cost Protective Collar
arrangement with a financial institution to reduce the exposure associated with
the 1.5 million shares of NPS common stock. By entering into this equity collar
arrangement and taking into consideration the underlying put and call option
strike prices, terms are structured so that the Company's investment in NPS
stock, when combined with the value of the equity collar, should secure ultimate
cash proceeds in the range of 85%-108% of the market value per share of $24.67
on the date the collar was entered into. The collar is considered a derivative
hedging instrument and as such, the Company will periodically measure its fair
value and recognize the derivative as an asset or a liability. The change in
fair value will be recorded in other comprehensive income or in the statement of
operations depending on its effectiveness. When the underlying shares become
unrestricted and freely tradable, the Company is required to deliver as posted
collateral a corresponding number of NPS Common Stock with the financial
institution. The Collar will mature in four separate three-month intervals
beginning November 2004 through August 2005 at which time the Company will
receive its proceeds from the sale of the securities. The amount due at each
maturity date will be determined based on the market value of NPS common stock
on such maturity date. The contract requires the company to maintain a minimum
cash balance of $30.0 million and additional collateral up to $10.0 million (as
defined) under certain circumstances with the financial institution. The strike
prices of the put and call options are subject to certain adjustments in the
event the Company receives a dividend from NPS.

(14)  Income Taxes

      Under the asset and liability method of Statement of Financial Accounting
Standards No. 109 ("SFAS 109"), deferred tax assets and liabilities are
recognized for the estimated future tax consequences attributable to differences
between financial statement carrying amounts of existing assets and liabilities
and their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. Under
SFAS 109, the effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.

      The components of the income tax provision (benefit) are summarized as
follows (in thousands):

                                                    June 30,
                                        --------------------------------
                                          2003        2002        2001
                                        --------    --------    --------
       Current:
            Federal                     $     --    $     --    $    217
            State                          6,589        (857)       (729)
                                        --------    --------    --------
       Total current                       6,589        (857)       (512)
                                        --------    --------    --------

       Deferred:
            Federal                       (5,454)     (6,132)         --
            State                           (912)     (2,134)         --
                                        --------    --------    --------
       Total deferred                     (6,366)     (8,266)         --
                                        --------    --------    --------
       Income tax provision (benefit)   $    223    ($ 9,123)   $   (512)
                                        ========    ========    ========


                                      F-25
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued

      The following table represents a reconciliation between the reported
income taxes and the income taxes which would be computed by applying the
federal statutory rate (35%) to income before taxes (in thousands):

<TABLE>
<CAPTION>
                                                                June 30,
                                                    --------------------------------
                                                      2003        2002        2001
                                                    --------    --------    --------
<S>                                                 <C>         <C>         <C>
      Income tax expense
        computed at federal
        statutory rate                              $ 16,082    $ 12,839    $  3,855

      Add (deduct) effect of:
          State income taxes (including sale
          and purchase of state net operating
          loss carryforwards), net of federal tax      3,690      (1,931)       (474)

      Federal tax benefit through
          utilization of net operating loss
          carryforwards against current               (8,349)    (13,116)     (3,983)
          period income

      Reduction in beginning of year
         Valuation allowance                         (11,200)     (6,915)         --
                                                    --------    --------    --------
                                                    $    223    ($ 9,123)   ($   512)
                                                    ========    ========    ========
</TABLE>

      During 2003, 2002 and 2001, the Company recognized a tax benefit of
$474,000, $857,000 and $728,000 respectively, from the sale of certain state net
operating loss carryforwards.


                                      F-26
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued

      At June 30, 2003 and 2002, the tax effects of temporary differences that
give rise to the deferred tax assets and deferred tax liabilities are as follows
(in thousands):

                                                                June 30,
                                                         --------------------
  Deferred tax assets:                                     2003        2002
                                                         --------    --------
  Inventories                                            $    335    $     49
  Compensation                                                992         271
  Returns and allowances                                    3,313          --
  Research and development credits carryforward            10,408      12,009
  Federal AMT credits                                       1,447          --
  Deferred revenue                                          1,319         396
  Write down of carrying value of investment               11,126          --
  Federal and state net operating loss carryforwards       53,698      74,574
  Other                                                     1,164       1,216
                                                         --------    --------

  Total gross deferred tax assets                          83,802      88,515

  Less valuation allowance                                (12,884)    (78,809)
                                                         --------    --------

                                                           70,918       9,706
                                                         --------    --------

  Deferred tax liabilities:
  Goodwill                                                 (2,399)         --
  Unrealized gain on securities                              (345)       (658)
  Book basis in excess of tax basis of acquired assets       (721)       (706)
                                                         --------    --------
                                                           (3,465)     (1,364)
                                                         --------    --------
  Net deferred tax assets                                $ 67,453    $  8,342
                                                         ========    ========

      A valuation allowance is provided when it is more likely than not that
some portion or all of the deferred tax assets will not be realized. At June 30,
2003, the Company had Federal net operating loss carryforwards of approximately
$134.0 million and combined state net operating loss carryforwards of
approximately $114.0 million that will expire in the years 2004 through 2021.
The Company also has federal research and development tax credit carryforwards
of approximately $9.8 million for tax reporting purposes, which expire in the
years 2004 to 2021. In addition, the Company has $528,000 of state research and
development tax credit carryforwards, which will expire in the year 2010. The
Company's ability to use the net operating loss and research and development tax
credit carryforwards are subject to certain limitations due to ownership
changes, as defined by rules pursuant to Section 382 of the Internal Revenue
Code of 1986, as amended.

      As of June 30, 2003, management believes that it is more likely than not
that the deferred tax assets will be realized, including the net operating
losses from operating activities and stock option exercises, based on future
operations, and has recognized approximately $67.5 million as a net deferred tax
asset at June 30, 2003 related to the expected future profits (approximately
$54.0 million of the deferred tax asset that was recognized in 2003 relates to
net operating losses generated through the exercise of stock options for which
the tax benefit was recorded as additional paid in capital). The Company has
retained a valuation allowance of $12.8 million with respect to certain capital
losses and federal research and development credits at June 30, 2003 as the
ultimate utilization of such losses and credits is uncertain and will continue
to reassess the need for such valuation allowance in accordance with SFAS 109
based on the future operating performance of the Company. At June 30, 2002 the
valuation allowance covered all the net operating losses except the expected
fiscal 2003 usage based on projected earnings, which at the time was the only
portion deemed more likely than not to be utilized.


                                      F-27
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued


      The net operating loss carryforward stated above, includes $2.5 million
from the acquisition of Enzon Labs, Inc. the utilization of which is limited to
a maximum of $615,000 per year.

(15)  Significant Agreements

      Schering Agreement

      In November 1990, the Company entered into an agreement with
Schering-Plough. Under this agreement, Schering-Plough agreed to apply Enzon's
PEG technology to develop a modified form of Schering-Plough's INTRON A.
Schering-Plough is responsible for conducting and funding the clinical studies,
obtaining regulatory approval and marketing and manufacturing the product
worldwide on an exclusive basis and the Company receives royalties on worldwide
sales of PEG-INTRON for all indications. The royalty percentage to which the
Company is entitled will be lower in any country where a pegylated
alpha-interferon product is being marketed by a third party in competition with
PEG-INTRON, where such third party is not Hoffmann-La Roche.

      PEG-INTRON received marketing authorization in the European Union as a
stand-alone therapy for hepatitis C in May 2000 and as a combination therapy
with REBETOL in March 2001. Schering-Plough received FDA approval for PEG-INTRON
as a stand-alone therapy for the treatment of hepatitis C in January 2001 and as
a combination therapy with REBETOL for the treatment of hepatitis C in August
2001.

      In June 1999, the Company amended its agreement with Schering-Plough,
which resulted in an increase in the effective royalty rate that it receives for
PEG-INTRON sales. In exchange, the Company relinquished its option to retain
exclusive U.S. manufacturing rights for this product. In addition, the Company
granted Schering-Plough a non-exclusive license under some of its PEG patents
relating to Branched or U-PEG technology. This license gives Schering-Plough the
ability to sublicense rights under these patents to any party developing a
competing interferon product. During August 2001, Schering-Plough, pursuant to a
cross license agreement entered into as part of the settlement of certain patent
litigation, granted Hoffmann-La Roche a sublicense under the Company's Branched
PEG patents to allow Hoffmann-La Roche to make, use, and sell its pegylated
alpha-interferon product, PEGASYS.

      In January 2001, the Company earned a final $2.0 million milestone payment
upon the FDA's approval of PEG-INTRON and in February 2000 the Company earned a
$1.0 million milestone payment when the FDA accepted the Biologics License
Application, or BLA, for PEG-INTRON filed by Schering-Plough. These milestone
payments were recognized when received, as the earnings process was complete.
Schering-Plough's obligation to pay the Company royalties on sales of PEG-INTRON
terminates, on a country-by-country basis, upon the later of the date the last
patent of the Company to contain a claim covering PEG-INTRON expires in the
country or 15 years after the first commercial sale of PEG-INTRON in such
country.


                                      F-28
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued

      Schering-Plough has the right to terminate this agreement at any time if
the Company fails to maintain the requisite liability insurance of $5.0 million.
Either party may terminate the agreement upon a material breach of the agreement
by the other party that is not cured within 60 days of written notice from the
non-breaching party or upon declaration of bankruptcy by the other party.

      Aventis Agreement

      During June 2002, the Company amended its license agreement with Aventis
to reacquire rights to market and distribute ONCASPAR in the United States,
Mexico, Canada and the Asia/Pacific region. In return for the marketing and
distribution rights the Company paid Aventis $15.0 million and pays a 25%
royalty on net sales of ONCASPAR through 2014. The $15.0 million dollar payment
is being amortized over its useful life of 14 years. The amortization and the
25% royalty payment to Aventis are included in cost of sales for the product.
Prior to the amendment, Aventis was responsible for the marketing and
distribution of ONCASPAR. Under the previous agreement Aventis paid the Company
a royalty on net sales of ONCASPAR of 27.5% on annual sales up to $10.0 million
and 25% on annual sales exceeding $10.0 million.

      The amended license agreement prohibits Aventis from making, using or
selling an asparaginase product in the U.S. or a competing PEG-asparaginase
product anywhere in the world until the later of the expiration of the agreement
or, if the agreement is terminated earlier, five years after termination. If the
Company ceases to distribute ONCASPAR, Aventis has the option to distribute the
product in the territories under the original license.

      Under the Company's license agreement with Aventis in effect prior to the
June 2002 amendment discussed above (the "Prior License Agreement"), Enzon
granted an exclusive license to Aventis to sell ONCASPAR in the U.S. Enzon has
received licensing payments totaling $6.0 million and was entitled to royalties
on net sales of ONCASPAR. During July 2000, the Company further amended the
license agreement with Aventis to increase the base royalty payable to the
Company on net sales of ONCASPAR from 23.5% to 27.5% on annual sales up to $10.0
million and 25% on annual sales exceeding $10.0 million. These royalty payments
included Aventis' cost of purchasing ONCASPAR under a separate supply agreement.
The agreement was also extended until 2016. Additionally, the Prior License
Agreement eliminated the super royalty of 43.5% on net sales of ONCASPAR which
exceeded certain agreed-upon amounts. The Prior License Agreement also provided
for a payment of $3.5 million in advance royalties, which was received in
January 1995.

      As part of the June 2002 amendment, the remaining unpaid royalty advance
on the balance sheet of $1.0 million was eliminated. This was offset against the
$15.0 million payment to Aventis and the net $14 million is included in
amortizable intangible assets, net and is being amortized over 14 years, the
estimated remaining life of ONCASPAR.

      During August 2000, the Company made a $1.5 million payment to Aventis
which was accrued at June 30, 2000 to settle a disagreement over the purchase
price of ONCASPAR under the supply agreement and to settle Aventis' claim that
Enzon should be responsible for Aventis' lost profits while ONCASPAR was under
temporary labeling and distribution modifications. In November 1998, the Company
and the FDA agreed to temporary labeling and distribution modifications for
ONCASPAR, as a result of certain previously disclosed manufacturing problems.
These temporary modifications resulted in Enzon, rather than Aventis,
distributing ONCASPAR directly to patients on an as needed basis.


                                      F-29
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued

      The settlement also called for a payment of $100,000 beginning in May 2000
and for each month that expired prior to the resumption of normal distribution
and labeling of this product by Aventis. During The quarter ended December 31,
2000, the FDA gave final approval to the Company's manufacturing changes, which
were made to correct these problems, and all previously imposed restrictions on
ONCASPAR were lifted. This obligation was terminated pursuant to the June 2002
amendment to the license agreement. Payments as required were made through June
2002.

      MEDAC Agreement

      The Company also amended the exclusive license to MEDAC to sell ONCASPAR
and any PEG-asparaginase product, developed by the Company or MEDAC, during the
term of the agreement in most of Europe and part of Asia. The Company's supply
agreement with MEDAC provides for MEDAC to purchase ONCASPAR from the Company at
a certain established price. MEDAC is also responsible to pay the Company a
royalty on units sold. Under the license agreement, MEDAC is responsible for
obtaining additional approvals and indications in the licensed territories,
beyond the currently approved hypersensitive indication in Germany. Under the
agreement, MEDAC is required to meet certain minimum purchase requirements. The
Company signed the amended license agreement with MEDAC in January 2003.

      Nektar Agreement

      In January 2002, the Company entered into a broad strategic alliance with
Nektar Therapeutics that includes the following components:

      o     The companies entered into a product development agreement to
            jointly develop three products to be specified over time using
            Nektar's Enhance(TM) pulmonary delivery platform and SEDS(TM)
            supercritical fluids platform. Nektar will be responsible for
            formulation development, delivery system supply, and in some cases,
            early clinical development. The Company will have responsibility for
            most clinical development and commercialization. This agreement
            terminates in January 2007 unless terminated earlier by either party
            upon 90 days notice of a material breach or 15 days notice of a
            payment default.

      o     The two companies will also explore the development of single-chain
            antibody (SCA) products for pulmonary administration.

      o     The Company has entered into a cross-license agreement with Nektar
            under which each party has crosslicensed to the other party certain
            patents. The Company also granted to Nektar the right to grant
            sub-licenses under certain of the Company's PEG patents to third
            parties. The Company will receive a royalty or a share of profits on
            final product sales of any products that use its patented PEG
            technology. The Company anticipates that it will receive 0.5% or
            less of Hoffmann-LaRoche's sales of PEGASYS, which represents equal
            profit sharing with Nektar on this product. There are currently two
            PEG products licensed through the Company's Nektar partnership in
            late stage clinical trials, MACUGEN (pegatanib) for age-related
            macular degeneration and diabetic macular edema and CDP-870, an
            anti-TNF therapy for rheumatoid arthritis, both of which are being
            developed by Pfizer. The Company retains the right to use all of its
            PEG technology and certain of Nektar's PEG technology for its own
            product portfolio, as well as those products it develops in
            co-commercialization collaborations with third parties. This
            agreement expires upon the later of the expiration of the last
            licensed


                                      F-30
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued

            patent or the date the parties are no longer required to pay
            royalties. Either party may terminate the agreement upon a material
            breach of the agreement by the other party that is not cured within
            90 days of the receipt of written notice from the non-breaching
            party or upon the declaration of bankruptcy by the other party.

      o     The Company purchased $40 million of newly issued Nektar convertible
            preferred stock in January 2002. The preferred stock is convertible
            into Nektar common stock at a conversion price of $22.79 per share.
            In the event Nektar's common stock price three years from the date
            of issuance of the preferred stock or earlier in certain
            circumstances is less than $22.79, the conversion price will be
            adjusted down, although in no event will it be less than $18.23 per
            share. Conversion of the preferred stock into common stock can occur
            anywhere from 1 to 4 years following the issuance of the preferred
            stock or earlier in certain circumstances. Under the cost method of
            accounting, investments are carried at cost and are adjusted only
            for other-than-temporary declines in fair value, distributions of
            earnings and additional investments. As a result of the continued
            decline in the price of Nektar's common stock, the Company
            determined during the three months ended December 31, 2002 that the
            decline in the value of its investment in Nektar was other than
            temporary. Accordingly, the Company recorded a write down of the
            carrying value of its investment in Nektar, which resulted in a
            non-cash charge of $27.2 million. The adjustment was calculated
            based on an assessment of the fair value of the investment.

      o     The two companies also agreed in January 2002 to a settlement of the
            patent infringement suit the Company filed in 1998 against Nektar's
            subsidiary, Shearwater Polymers, Inc. Nektar has a license under the
            contested patents pursuant to the cross-license agreement. The
            Company received a one-time payment of $3.0 million from Nektar to
            cover expenses incurred in defending its branched PEG patents.

      Micromet Agreement

      On April 10, 2002, the Company announced a multi-year strategic
collaboration with Micromet AG ("Micromet"), a private company based in Munich,
Germany, to identify and develop the next generation of antibody-based
therapeutics. Under the terms of the agreement, the Company and Micromet
(collectively, the Partners) agreed to combine their significant patent estates
and complementary expertise in single-chain antibody ("SCA") technology to
create a leading platform of therapeutic products based on antibody fragments.
Enzon and Micromet will share equally the costs of research and development, and
plan to share the revenues generated from technology licenses and from future
commercialization of any developed products. Following the termination or
expiration of the agreement, the rights to antibody-based therapeutics
identified or developed by Enzon and Micromet will be determined in accordance
with the United States rules of inventorship. In addition, Enzon will acquire
the rights to any PEGylation inventions. The agreement can be terminated by
either party upon a material breach of the agreement by the other party.
Research and development expenses incurred by the Company in connection with
such collaboration agreement totaled $1.7 million and $0 million for the year
2003 and 2002, respectively.

      In addition to the R&D collaboration, the Company made an $8.3 million
investment into Micromet in the form of a note of Micromet which bears interest
at 3% and is payable in March 2006. This note is convertible into Micromet
Common Stock at a price of $1,015 per share at the election of either party and
is classified as investments in equity securities and convertible note in the
Consolidated Balance Sheets.


                                      F-31
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued

      The parties have entered into a cross-license agreement for their
respective SCA intellectual property and have decided to jointly market their
combined SCA to third parties. Micromet will be the exclusive marketing partner
and has instituted a comprehensive licensing program on behalf of the
partnership, for which the parties will share equally in the costs and revenues.

      SkyePharma Agreement

      In January 2003, the Company entered into a strategic alliance with
SkyePharma, PLC based on a broad technology access agreement. The two companies
agreed to jointly develop up to three products for future commercialization.
These products are based on SkyePharma's proprietary platforms in the areas of
oral, injectable and topical drug delivery, supported by technology to enhance
drug solubility and certain of the Company's proprietary PEG modification
technology, for which the Company received $3.5 million technology access fee.
This non-refundable upfront license fee, which was recorded as unearned revenue
in accrued expenses, is being ratably recognized as revenue over the development
agreement period of four years. SkyePharma will receive a $2.0 million milestone
payment for each product based on its own proprietary technology that enters
Phase II clinical development. Research and development costs related to the
technology alliance is being shared equally based on an agreed upon annual
budget, as will future revenues generated from the commercialization of any
jointly-developed products.

      Effective December 31, 2002, the Company obtained an exclusive license for
the right to sell, market and distribute SkyePharma's DEPOCYT(R), an injectable
chemotherapeutic approved for the treatment of patients with lymphomatous
meningitis in the United States and Canada. Under the terms of the agreement,
Enzon paid a license fee of $12.0 million for the North American rights to
DEPOCYT which is being amortized over a 10 year period and charged to cost of
sales. SkyePharma manufactures DEPOCYT and Enzon purchases finished product at
35% of net sales, which amount can be reduced should certain defined sales
target be exceeded.

      The Company is required to purchase minimum levels of finished product for
calendar year 2003 (90% of the previous year's sales by SkyePharma) and $5.0
million for each subsequent calendar year. SkyePharma is also entitled to a
milestone payment of $5.0 million if the Company's sales of the product are over
a $17.5 million annual run rate for four consecutive quarters and an additional
milestone payment of $5.0 million if Enzon's sales exceed an annualized run rate
of $25.0 million for four consecutive quarters. The Company is also responsible
for a $10.0 million milestone payment if the product receives approval for
Neo-plastic Meningitis prior to December 31, 2006. This milestone payment is
incrementally reduced if the approval is received subsequent to December 31,
2006 to a minimum payment of $5.0 million for an ENZON approval after December
31, 2007. The Company's license is for an initial term of ten years and is
automatically renewable for successive two year terms thereafter. The Company
has recorded the $12.0 million payment in amortizable intangible assets, net
which is being amortized over a ten year period.

      Fresenius Agreement

      During June 2003 the Company licensed the North American right to develop
and commercialize ATG-Fresenius S from Fresenius Biotechnology. Under this
agreement, the Company is responsible for obtaining regulatory approval of the
product in the U.S. The Company will make milestone payments to Fresenius of
$1.0 million upon approval of the first IND and upon the Company's submission of
a biologics license application with the FDA, if any. Fresenius will be
responsible for manufacturing and supplying the product to the Company and the
Company is required to purchase all of the finished product from Fresenius for
net sales of the product in North America. The Company will purchase finished
product at 40% of net sales, which percentage can be reduced should certain
defined sales targets be exceeded. The Company is required to purchase a minimum
of $2.0 million of product in the first year after commercial introduction and
$5.0 million in the second year, with no minimum purchase requirements
thereafter. Fresenius will supply the product to the Company without charge for
the clinical trials for the first indication. For subsequent trials, the Company
will purchase the clinical supplies from Fresenius.


                                      F-32
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued

(16)  Commitments and Contingencies

      The Company's permit issued by the United States Department of Agriculture
("USDA") to import ADA expired in March 2003. The Company currently has more
than six months supply of ADA enzyme in inventory and has applied for a new
import permit from the USDA. The Company cannot guarantee that such import
permit will be issued. If the USDA fails to issue a new import permit or if the
Company's sole supplier is unable or unwilling to continue supplying the Company
with ADA, it is likely that the Company will be unable to produce or distribute
ADAGEN once it utilizes it's current inventory of ADA enzyme.

      The Company has agreements with certain members of its upper management,
which provide for payments following a termination of employment occurring after
a change in control of the Company. The Company also has an employment agreement
with its Chief Executive Officer and certain members of upper management which
provides for severance payments.

      The Company has been involved in various claims and legal actions arising
in the ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material effect on the Company's
consolidated financial position, results of operations or liquidity.

(17)  Leases

      The Company has several leases for office, warehouse, production and
research facilities and equipment. The non-cancelable lease-terms for the
operating leases expire at various dates between 2004 and 2021 and each
agreement includes renewal options.

      Future minimum lease payments, for non-cancelable operating leases with
initial or remaining lease terms in excess of one year as of June 30, 2003 are
(in thousands):

                  Year ending                               Operating
                  June 30,                                    leases
                  --------                                    ------
                    2004                                      $ 1,403
                    2005                                        1,391
                    2006                                        1,398
                    2007                                        1,421
                    2008                                        1,239
                  Thereafter                                   10,155
                                                              -------
                  Total minimum lease payments                $17,007
                                                              =======

      Rent expense amounted to $1.3 million, $847,000 and $856,000 for the years
ended June 30, 2003, 2002 and 2001, respectively.

(18)  Retirement Plans

      The Company maintains a defined contribution 401(k) pension plan for
substantially all its employees. The Company currently matches 50% of the
employee's contribution of up to 6% of compensation, as defined. Total Company
contributions for the years ended June 30, 2003, 2002, and 2001 were $375,000,
$196,000 and $156,000, respectively.


                                      F-33
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued

(19)  Business and Geographical Segments

      The Company is managed and operated as one business segment. The entire
business is comprehensively managed by a single management team that reports to
the Chief Executive Officer. The Company does not operate separate lines of
business or separate business entities with respect to any of its products or
product candidates.

      Accordingly, the Company does not prepare discrete financial information
with respect to separate product areas or by location and does not have
separately reportable segments as defined by SFAS No. 131.

            Revenues consisted of the following (in thousands):

                                            Years ended June 30,
                                       ------------------------------
                                         2003       2002       2001
                                       --------   --------   --------
           Product sales, net
              ADAGEN                   $ 16,025   $ 13,441   $ 13,369
              ONCASPAR                   12,432      8,742      7,400
              DEPOCYT                     2,458         --         --
              ABELCET                    28,349         --         --
                                       --------   --------   --------
              Total product sales        59,264     22,183     20,769
               Manufacturing revenue      8,742         --         --
              Royalties                  77,589     53,329      8,251
              Contract revenue              811        293      2,568
                                       --------   --------   --------
           Total revenues              $146,406   $ 75,805   $ 31,588
                                       ========   ========   ========

      During the years ended June 30, 2003, 2002 and 2001, the Company had
export sales and royalties recognized on export sales of $40.2 million, $26.3
million and $11.2 million, respectively. Of these amounts, sales and royalties
in Europe and royalties recognized on sales in Europe represented $35.5 million,
$24.9 and $10.2 million during the years ended June 30, 2003, 2002 and 2001,
respectively.

      Outside the United States, the Company principally sells: 1) ADAGEN(R) in
Europe 2) ONCASPAR in Germany 3) DEPOCYT(R) in Canada and 4) ABELCET in Canada.
Information regarding revenues attributable to the United States and to all
foreign countries collectively is stated below. The geographic classification of
product sales was based upon the location of the customer. The geographic
classification of all other revenues was based upon the domicile of the entity
from which the revenues were earned. Information is as follows ( in thousands):

                                            Years ended June 30,
                                       ------------------------------
                                         2003       2002       2001
                                       --------   --------   --------
           Revenues:
              United States            $106,160   $ 49,503   $ 20,427
              Foreign countries          40,246     26,302     11,161
                                       --------   --------   --------
                 Total revenues        $146,406   $ 75,805   $ 31,588
                                       ========   ========   ========


                                      F-34
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued

(20)  Write-down of Investment

      In January 2002, the Company entered into a broad strategic alliance with
Nektar Therapeutics to co-develop products utilizing both companies' proprietary
drug delivery platforms. As a part of this agreement, the Company purchased $40
million of newly issued Nektar convertible preferred stock which is currently
convertible into Nektar common stock at Enzon's option at a conversion price of
$22.79 per share. The investment represented approximately 3% of Nektar's
equivalent common shares outstanding at the time of issuance. Under the cost
method of accounting, non-marketable investments are carried at cost and are
adjusted only for other-than-temporary declines in fair value, distributions of
earnings and additional investments.

      As a result of the continued decline in the price of Nektar's common
stock, the Company determined that as of December 31, 2002 the decline in the
value of its investment in Nektar was other than temporary. Accordingly, during
the second quarter of its fiscal year 2003, the Company recorded a write down of
the carrying value of its investment in Nektar, which resulted in a non-cash
charge of $27.2 million. The adjustment was calculated based on an assessment of
the fair value of the investment which was determined during the quarter ended
December 31, 2002 by multiplying the number of shares of common stock that would
be received based on the conversion rate in place as of the date of the
agreement ($22.79 per share) by the closing price of Nektar common stock on
December 31, 2002, less a 10% discount to reflect the fact that the shares were
not convertible as of December 31, 2002, the valuation date.

      As of June 30, 2003, the carrying value of the Nektar investment, which is
included in investments in equity securities and convertible note on the
accompanying Consolidated Balance Sheet, was $12.8 million ($7.27 per share).
The closing price of Nektar common stock was $9.17 per share on June 30, 2003.


                                      F-35
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued

(21)  Quarterly Results of Operations (Unaudited)

      The following table presents summarized unaudited quarterly financial data
(in thousand, except per share amounts):

<TABLE>
<CAPTION>
                                                      Three Months Ended
                            ----------------------------------------------------------------------------
                            September 30,  December 31,      March 31,      June 30,      Fiscal Year
                                2002           2002            2003           2003            2003
                            ----------------------------------------------------------------------------
<S>                           <C>            <C>             <C>            <C>             <C>
Revenues                      $ 25,067       $ 31,497        $ 43,163       $ 46,679        $146,406
Gross Profit (1)                 4,144          4,187          15,556         15,598          39,485
Tax Provision (Benefit)            261            245             156           (439)            223
Net income (loss)             $ 12,784       ($15,244)       $  7,634       $ 40,552        $ 45,726
                              ========       ========        ========       ========        ========

Net income (loss) per
  common share:
     Basic                    $   0.30       $  (0.35)       $   0.18       $   0.94        $   1.06
     Diluted                  $   0.29       $  (0.35)       $   0.17       $   0.93        $   1.05

Weighted average
  number of shares of
  common stock
  outstanding-basic             42,980         43,011          43,192         43,264          43,116

Weighted average
number of shares of
  common stock and
  diluted potential
  common shares                 43,681         43,011          43,634         43,609          43,615
</TABLE>


                                      F-36
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
              Notes to Consolidated Financial Statements, Continued

<TABLE>
<CAPTION>
                                                             Three Months Ended
                                 --------------------------------------------------------------------------
                                 September 30,  December 31,      March 31,       June 30,      Fiscal Year
                                     2001           2001            2002            2002            2002
                                 --------------------------------------------------------------------------
<S>                                <C>            <C>             <C>             <C>             <C>
Revenues                           $ 12,144       $ 18,602        $ 19,844        $ 25,215        $ 75,805
Gross Profit (1)                      3,707          4,417           4,336           3,645          16,105
Tax Provision (Benefit)                  86           (182)           (267)         (8,760)         (9,123)
Net income                         $  4,230       $  8,645        $ 12,167        $ 20,764        $ 45,806
                                   ========       ========        ========        ========        ========

Net income per
   common share:
     Basic                         $   0.10       $   0.20        $   0.28        $   0.48        $   1.07
     Diluted                       $   0.10       $   0.20        $   0.28        $   0.47        $   1.04

Weighted
   average number
   of shares of
   common stock
   outstanding-basic                 42,122         42,767          42,969          42,982          42,726

Weighted
   average number
   of shares of
   common stock and
   dilutive potential
   common shares                     43,923         43,959          43,934          43,840          44,026
</TABLE>

(1)   Gross profit is calculated as the aggregate of product sales, net and
      manufacturing revenue less cost of sales and manufacturing revenue.


                                      F-37
<PAGE>

                  ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
                 Schedule II - Valuation and qualifying accounts
                                 (In thousands)

<TABLE>
<CAPTION>
                                   Balance at             Additions              Deductions -    Balance at end of
                                  beginning of  ------------------------------     describe           period
                                     period      Charged to     Charged to
                                                 costs and   other accounts -
                                                  expenses       describe
                                 -----------------------------------------------------------------------------------
<S>                                     <C>             <C>     <C>              <C>                  <C>
Year ended June 30, 2003
   Allowance for chargebacks,
   returns and cash discounts           --              --      $18,997 (1)      (10,886) (2)         $8,111
</TABLE>

(1)   Amounts are recognized as a reduction from gross sales.

(2)   Chargebacks, returns and cash discounts processed.


                                      F-38
<PAGE>

                                  EXHIBIT INDEX

<TABLE>
<CAPTION>
Exhibit                                                                                             Page
Numbers                                         Description                                        Number
-------                                         -----------                                        ------
<S>              <C>                                                                                 <C>
10.8             Modification of Lease Dated May 14, 2003 - 300-C Corporate Court,
                 South Plainfield, New Jersey                                                        E-2

10.22            Independent Directors' Compensation Arrangement                                     E-5

12.1             Computation of Ratio of Earnings to Fixed Charges                                   E-6

21.0             Subsidiaries of Registrant                                                          E-7

23.0             Consent of KPMG LLP                                                                 E-8

31.1             Certification of Chief Executive Officer pursuant to Rule 13a-14(a) (Section
                 302 Certification), as Adopted Pursuant to Section 302 of the                       E-9
                 Sarbanes - Oxley Act of 2002

31.2             Certification of Chief Financial Officer pursuant to Rule 13a-14(a) (Section
                 302 Certification),as Adopted Pursuant to Section
                 302 of the Sarbanes - Oxley Act of 2002                                             E-10

32.1             Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as
                 Adopted Pursuant to Section 906 of the Sarbanes - Oxley Act of 2002                 E-11

32.2             Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as
                 Adopted Pursuant to Section 906 of the Sarbanes - Oxley Act of 2002                 E-12
</TABLE>


                                      E-1